Is the Era of the Large Outsourcing Deal Over?

25 Feb ’05

The WSJ (paid subscription required) is reporting that because of customer demands, IBM is shifting to outsourcing agreements that are shorter in term and smaller in scope.

I’ve been waiting to hear this for a long time now – it has for a while seemed the natural consequence of the high % of high profile deals that go sideways – an inevitable consequence, perhaps, of managing extreme complexity.  Money quote (among many):

"The era of the big monolithic outsourcing deal is coming to an end," says Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co. "Customers are a lot smarter. They divide [projects] up into best of breed."

The big technology-outsourcing deals, in which a company transfers systems and employees over to IBM and pays a fee, can last seven years or more and be valued at billions of dollars. But they also are fraught with complexity, require substantial amounts of up-front investment and are heavily subject to the whims of clients. Deals that don’t go well can be painful. IBM last year lost a major, long-term outsourcing agreement with J.P. Morgan Chase & Co. when the bank took back a large portion of its technology operations.

And of course, there is this to think about.

Look for biglaw IT law departments to take another hit as a result – increasingly they have been gearing themselves to serve only the high dollar value transaction market, and have been leaving the everyman clients behind as a result of stratospheric hourly rates that cash-starved IT businesses cannot (but really, who can?) afford.  And of course, as this market shrinks and mid-sized deals become more common, the talent pool that can do them (including inhouse teams) will get much bigger and more competitive …

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