Tom Seal (Senior Program Director, European Services)

In recent years the average size of services deals signed has been falling. This has been driven by changes at both ends of the deal size spectrum.

The number of large new deals has been falling naturally as the IT outsourcing market has reached maturity, but the focus on digital transformation also has a role to play in suppressing the number of large outsourcing deals in particular.

The biggest outsourcing exercises are most often driven by the client having reached the decision that a large part of their IT function is performing activities they consider non-core. The prevailing wisdom has been that non-core activities should be outsourced to a provider whose primary business activity is delivering such services.

This provider would have an economic advantage in delivering these services cost effectively.

Client Attitudes are Changing

Client attitudes towards what is core and non-core are changing, though, and the proportion of IT activities that businesses are likely to classify as non-core is falling. This is due to a recognition that technology has become more important as a competitive differentiator. Also, that digital business models are becoming relevant in almost all industries, even those not historically considered high tech.

These changes in customer attitudes and the maturity of the IT outsourcing market means new large deals are relatively rare. But there are opportunities in this part of the market relating to renewals. We believe the cost pressures created by the COVID-19 crisis will increase the likelihood of clients running competitive sourcing processes when renewing contracts, rather than extending the contract with the incumbent provider.

The financial pressures created by COVID-19 also have the potential to trigger the return of the outsourcing megadeal, at least in the short term, as some businesses use IT outsourcing as part of their survival strategy. Afterall, the IT outsourcing megadeal is still the fastest way to achieve big IT cost reductions for large businesses.

Small IT Services Deals are Rising

The number of smaller services deals is also rising fast. According to the IDC Services Contract Database the proportion of deals classified as small (less than $10M) jumped from 66% in 2016 to 74% in 2019 (in terms of volume, not value).

This increasing number of smaller deals is driven by clients preferring smaller, more agile projects that deliver business value quickly. There has also been a trend towards utilizing a larger number of services firms together on a single project.

This utilization of an ecosystem of providers on a single project has been described as the “a la carte” approach to services souring. Here, providers are brought in just to deliver on their particular strength or specialism.

The hope among service providers is that while these deals are lower value on average, they are plentiful enough and deliver enough of a margin premium that the opportunity outweighs the threat. Recently, an executive at a major systems integrator explained that they don’t fear this trend, confirming that the margin is often indeed higher. However, they did question whether clients had the ability to manage a larger number of smaller, more agile deals.

Services firms need dual strategies to tackle the trend of reducing deal sizes. There is a need to be able to deliver smaller, agile projects profitably, as well as the need to create a cost advantage to win business from the incumbent providers of major outsourcing services.


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