£7bn outsourcing "turmoil" ahead

Big outsourcing firms could be in for a rocky time as increasingly savvy customers look to slice up contracts and hand out work to smaller specialist firms.

Loyalty is "virtually non-existent" among outsourcing customers, who see little difference between the main providers and are increasingly interested in offshore outsourcers that have upped their innovation, according to a report from outsourcing advisors Morgan Chambers.

As a result UK businesses are facing "outsourcing turmoil", with nearly £7bn worth of outsourcing deals up for renewal by March 2008, the report said.

silicon.com Financial Services

Get the latest financial services news straight to your inbox. Sign up for the FS newsletter today!

The consultancy predicts the big outsourcing providers will see their high-value contracts broken up and shared out to a number of providers in the next two years, in the biggest shake-up the industry has seen since the late 1990s.

Morgan Chambers said its research identified a clear trend away from 'sole source' deals in the UK - giving the whole outsourcing contract to a single provider - towards 'multi-sourcing', where smaller, specialist companies pick up chunks of business in shorter-term deals.

This could have a "serious impact" on the revenues of the big outsourcing providers, who are likely to respond by acquiring or collaborating with smaller specialists in order to hold onto business.

On average, each UK outsourcing contract is worth in the region of £28.5m, with the largest contract up for renewal worth almost £900m.

Offshore providers are also beginning to overtake the traditional providers on innovation, the research claims, and as a result companies are looking at them for "strategic" rather than just price reasons.

Morgan Chambers CEO Phil Morris said as the outsourcing market has matured, clients are becoming smarter.

"We will see a period of consolidation in the marketplace as providers fight to keep their existing business in any way they can. Overall, the market continues to grow, but contracts will fragment, with more multi-source deals being signed," he said in a statement.

But outsourcing customers still have work to do - they will have to learn to manage outsourcing contracts effectively, rather than handing responsibility to a vendor. According to Morgan Chambers research nearly half of UK companies admit to having weak to medium levels of skill in this area.

"Working without a proper decision framework to define policies, procedures and resources can lead to disaster. As the outsourcing market fragments, governance will become more and more important," Morris warned.