Indian outsourcing hits IT suppliers

The increasing popularity of offshore outsourcing and a decline in the number of mega-deals have caused the size of IT services deals to drop by half in the second quarter of this year.

Figures from analyst house Datamonitor and outsourcing advisors Everest Group show that the average size of contracts announced by IT and business process outsourcing (BPO) vendors fell in the second quarter of 2005 to $56m (£32m) compared to $106m (£60.5m) in the corresponding period last year.

This means that average deal size has now declined for four consecutive quarters.

Datamonitor tracked a total of 447 deals during the second quarter of 2005, which represented a 7.5 per cent increase over the 416 contracts logged in the same period a year earlier but said the value of deals fell by 43 per cent from $44.1bn (£25.2bn) to $25bn (£14.2bn).

This decline in average deal size was largely due to a fall in the number of mega-deals signed during the quarter, the analysts said.

It tracked three deals with a value greater than $1bn (£572m) - two for IBM and one for BT Group - compared to six in the second quarter of 2004. And the number of deals worth more than $100m (£57m) also fell to 49 from 70 over the same period.

Datamonitor global computing services lead analyst Nick Mayes said: "Clients continue to take a more selective approach to outsourcing which is reducing the number of mega-deals that are up for grabs.

"Another of the major trends that while elusive to see in the publicly reported deals is the impact that the offshore Indian suppliers are having on the market."

Michel Janssen, president of supplier solutions at outsourcing advisory firm Everest Group said the market is seeing "phenomenal" growth from suppliers like Infosys, TCS and Wipro.

"Their small projects wins are becoming larger, taking market share away from the traditional tier one suppliers. While most of their deals are not publicly reported we know by looking at their employee growth that they are continuing at a pace that is in the 30 per cent to 40 per cent range and are threatening to become large enough to be classified as tier one suppliers," he said.