There has been a significant growth in the value of new IT services contract signings in the first nine months of 2004, despite fears of a slowdown in the number of companies embarking on major outsourcing initiatives.
ComputerWire’s IT services contracts database has tracked a total of 1,289 contracts in major outsourcing, integration and consulting contracts, worth $122.4 billion, in the nine months ending September 30, which already exceeds the $118.9 billion of deals recorded in the whole of 2003.
Recent announcements by JP Morgan and UBS that they were canceling their outsourcing relationships suggested the beginning of a broader trend for companies to take a more selective approach to sourcing external IT services expertise, without outsourcing large chunks of their IT infrastructure.
However, continued growth in spending on outsourcing and new integration and consulting projects in the defense and government sectors, as well as continued growth in spending on business process outsourcing has ensured that overall spending in 2004 has outstripped that in the previous year.
The IT Services Contracts Database tracks all disclosed outsourcing (IT and BPO), systems integration and consulting contracts with a minimum value of $1 million.
The growth between the third quarter of 2004 and the year-ago period was particularly strong, despite it being a typically quite period due to the vacation season.
ComputerWire tracked a total of 438 contracts (including all disclosed IT and business process outsourcing, consulting and systems integration deals with a value greater than $1 million) announced during the third quarter of the year, worth a combined total of $41.9 billion.
This represents 50% growth over the third quarter of 2003 when the total value of contracts reached $27.9 billion. It also represented the fifth consecutive quarter of growth in contract valuations, although this is likely to halt in the fourth quarter of this year, due to the unusually high value of deals in the final quarter of 2003 driven by new deals at the UK’s National Health Service and Inland Revenue department.
There was also a 52% increase in the average value of contract size to $95.7 million in the third quarter of 2004 from $62.8 million in the year-ago period, reflecting the sector’s stability and early signs of a return to growth in discretionary spending on new consulting and integration assignments.
There has been some speculation that the number of mega-outsourcing contracts being signed is on the wane. This week, Accenture announced that it expects its order pipeline to remain flat at around $20 billion in the year to August 2005, which it partly attributes to a move away from mega-deals, and towards more strategic multi-sourcing.
However, the number of billion-dollar deals increased to eight in the third quarter compared to six in the year-ago period, although the number of contracts with a value greater than $100 million fell to 65 from 68.
Outsourcing advisory firm TPI Inc also pointed to a growth in mega-deals in their latest quarterly review of contracts in which they have been involved. The company said that mega-deals (contracts with a value greater than $1 billion in TPI’s classification) accounted for 17% of all transactions that it tracked during the quarter, which it said was the highest percentage since the third quarter of 2000, when mega-deals accounted for 25% of the contracts signed in the broader market.