Longer-Term Outsourcing Contracts Gain Favor

Longer-term, single-supplier IT outsourcing contracts are becoming increasingly widespread because multi-sourcing arrangements have failed to deliver.

This is according to U.K.-based IT analyst firm Ovum, which has set out its predictions for IT buyer priorities in a report, "2013 Trends to Watch: Bundled Outsourcing." It claims that, despite the growing requirement for agility and for companies to deliver quick wins from current IT projects, there is recognition that, unless they do the groundwork, organizations won't achieve the strategic transformations they seek.

"Buyers are now on their second and third generation of outsourcing, and are mature enough in their purchasing of services to know what they need to deliver their transformation agendas," said Jens Butler, principal analyst, IT services at Ovum, commenting on the report. "This is a trend that has been building for some time. In the mid-noughties there was a preference for using multiple best-of-breed suppliers, but for many the reality was an associated loss of control. Too often the right hand didn't know what the left was doing." This in turn led to escalating costs, scope creep and a failure to deliver the expected results.

[ See how creative CIOs get savings, flexibility and specialized skills from their IT outsourcers. Read Outsourcing's New Reality: Choice Beats Cost. ]

Having worked hard to align IT with the business and achieve greater clarity of the company's strategic direction, organizations now have more at stake when outsourcing projects and require tighter governance, Butler said. "Projects are no longer just about saving money, but rather to lead a particular market within 3-5 years, or to drive up customer satisfaction ratios."

Ovum, which tracks the global market for packaged outsourcing services on a quarterly basis, claims that average contract lengths internationally are now above four years -- especially across the government sector, but also in manufacturing and financial services. The shift is particularly pronounced in the insurance industry where many contracts are closer to seven lengths, according to Butler. "This reflects the level of transformation required in these markets," he commented. "Contract sizes have increased too, hitting $72 million in the most recent quarter."

In 2013 IT buyers will be looking for stability, capability and accessibility in their outsourced service partners, according to the Ovum report. "As their goals become more ambitious, requiring longer-term support and with a high interdependence on systems and services, organizations need to be sure that the vendors they take on will still be around in five years' time. The desire for stability and control, which is being led by the government sector, now ranks as a number two priority, up from four or five out of 10," Butler said.

Buyers are also looking for a sufficient breadth and depth of capability, technologically and geographically, he added. "They need to be able to access those resources readily too, so we're seeing suppliers respond by appointing relationship managers who can engage with companies at a business level."

Another marked change which appears at odds with companies' need to be more responsive and deliver rapid results, is that organizations are now taking three to six months upfront to understand their exact requirements before embarking on what might be a five-year program of investment, Butler said.

To secure budget for this investment, IT buyers have found that if they base projects on topical priorities, such as BYOD-driven mobility or big data/analytics initiatives, the business case is deemed stronger, he noted. "Money tends to flow more easily if projects are seen to tie in with these hot topics -- much more so that with 'boring old infrastructure' work." Social collaboration and cloud-based initiatives are further priorities meeting these criteria.

Flexibility remains important however. "As organizations plan ahead, what they can't do is set down a rigid roadmap for five years, where any changes to it could risk derailing the whole project," Butler warned. "But once they have achieved a clearer understanding of their priorities and how these can be met through work on their infrastructure, it becomes easier to identify the quick wins."