JP Morgan’s decision to terminate its planned $5 billion outsourcing contract with IBM Global Services has been viewed as symptomatic of a broader industry move away from mega-outsourcing contracts. This is reinforced by UBS’s announcement this week that it would use Perot Systems in a reduced capacity when their outsourcing pact ends at the beginning of 2007.
Perot generated $242 millionin sales from the UBS deal in 2003, accounting for nearly 17% of its revenue, and it admits that it will lose the majority of income from UBS when the contract expires.
But with many major IT outsourcing vendors pinning their hopes on major contract awards in coming quarters to meet their bookings and revenue targets, does this mean that the industry is heading for a big correction?
ComputerWire’s IT services contracts database, an online resource that tracks all major services contract signings, shows that there has been no slowdown in mega-contract signings in the current quarter.
New contract signings in the third quarter of 2004 to September 23 are already up on last year’s levels. In the third quarter of 2003, ComputerWire tracked 444 deals worth a combined $27.9 billion in its IT Services Contracts Database. In the third quarter to date, we have already logged 369 deals with a combined value of $39bn.
The $39 billion total for the current quarter does include the $9bn, five-year communications overhaul announced by the US Army earlier this month, but even if that is stripped out, third-quarter 2004 bookings remain ahead of the fourth quarter.
At the heart of this growth has been a string of mega-deals. So far, we have tracked some 11 contracts with a minimum value of $1bn, and 80 deals with a value in excess of $100 million announced in the third quarter. This represents a significant increase over the six $1 billion deals and 68 deals with a minimum value of $100 million that it tracked during the third quarter of 2003.
The fourth quarter of 2004 is not going to be as fruitful for IT services vendors as the fourth quarter of 2003, where major awards by the UK National Health Service and the Department of Inland Revenue gave a huge boost to the vendor community. ComputerWire tracked 11 $1 billion deals and 81 deals with a value greater than $100 million during the fourth quarter of 2003.
ComputerWire’s IT Services contracts database shows 155 outsourcing and managed services contracts with a minimum value of $1 million that are due for renewal in the fourth quarter of 2004. The contracts have a combined value of $3.2bn, the largest of which are IBM Global Services’ $230 million deal with the Australian Government and the vendor’s $112 million deal with Ames’ Department Store. We do not know of any billion-dollar deals up for renewal during the quarter.
However, the well of mega-deals is not set to run dry just yet. Tom White, head of Siemens Business Services in the UK, said he has seen no signs of his order pipeline slowing down this year. He said: We typically go for contracts with an annual value of between GDP50 million ($90 million) to GDP150 million ($270 million), and our bid activity has been stable this year. I don’t have a problem finding opportunities for our bid team to pursue.
SBS is poised to win a major GBP2 billion ($3.7 billion), ten-year outsourcing deal with the state-owned BBC following successful negotiations with government representatives. Mr White believes that other media and broadcasting companies may consider bringing in outsourcers to help manage the core IT platform that underpins their various delivery channels. He is aiming to build up SBS’ media and broadcast IT services unit into a GBP16 billion ($29 billion) annual business in the UK by 2007, with the BBC representing just 20% of that total.
There are other large deals in the pipeline. LogicaCMG is close to clinching a contract with Electricidade de Portugal that is expected to be worth several hundred million dollars. IBM Global Services was jilted by JP Morgan, but it remains in talks with UK-based bank Lloyds TSB over a planned outsourcing deal that could be worth up to GBP1 billion ($1.8 billion) over 10 years.
IBM is also in the running for two major deals in Australia. IBM has been short-listed for a contract with Integral Energy reportedly worth between A$10 million ($7 million) to A$15 million ($10.4 million) per year, where it would take over from incumbent supplier EDS. IBM is also the front-runner for a contract with three of Australia’s major banks: National Australia Bank, Westpac and CBA, to provide processing services. IBM is competing against EDS and Unisys for the deal that is expected to be worth about A$300 million ($210 million) over three years.
The defense sector will also continue to be a source of major IT services awards. The US Army unveiled plans this week to award contracts for performance-based IT services next year as a follow-up to the service’s IT Enterprise Solutions program. The Army will issue request for proposals in January 2005 and will award the contracts – which are expected to be worth between $2 billion to $5 billion, next spring.