Competitive squeeze hits outsourcing market

The size of individual outsourcing deals is shrinking to record low levels and their value is dropping, according to research conducted by an outsourcing consultancy. The number of deals, though, is increasing.

Consultancy TPI has found that the final quarter of 2006 was the worst fourth quarter for the sector in five years by value of deals done. The value of new contracts also dipped, by 8%.

Contracts are getting smaller but more numerous, TPI found, and focus on single, specialised areas. The number of contracts agreed in 2006 was 350, slightly up on the previous year's 341.

"The trend towards shorter contract duration means that outsourcing providers are obliged to compete more often in order to secure the same level of business," said Duncan Aitchison, the managing director of TPI in Europe, Africa and Asia.

"For many the cost of sale can become a major issue. Consequently service providers need to be increasingly selective in terms of the contracts they pursue," said Aitchison.

While the size of deals is shrinking, the number of companies winning those contracts is increasing, creating a competitive squeeze on providers. The number of companies winning deals has increased by 64% in four years, said TPI, and the six largest companies in outsourcing – Accenture, ACS, CSC, EDS, HP and IBM – are winning a decreasing proportion of the biggest deals. The market share of those six firms in the market for contracts that are worth more than $50 million fell from 71% in 2002 to 46% in 2006.

Ben Doherty, an employment specialist with Pinsent Masons, said that changing regulations could be behind the move to smaller, shorter contracts.

"One explanation for the trend towards shorter and smaller contracts could be the changes made to the TUPE [Transfer of Undertakings (Protection of Employment)] regulations last year," said Doherty. "TUPE has been in force for more than 20 years and the Regulations operate to protect the employment of employees when the undertaking that they are employed by transfers to a new owner. Following changes made in last year's amended Regulations there is now statutory certainty that the Regulations apply to outsourcing deals as they fall within the definition of service provision changes."

"A service provision change will always be covered by the Regulations unless it constitutes a single specific event or a task of short term duration," said Doherty. "Potentially this means that to avoid the Regulations applying and thus preventing the transfer of employees, we will see the increased use of short term contracts or contracts for a specific event. As the Regulations do not define what period constitutes a short term duration whether these attempts will be successful will be a matter for the courts to decide."