Outsourcing : Traditional Big Six Increasingly On Shaky Grounds

Recently this blog covered the development, Private Equity Dalliance With Outsourcing Majors. We also covered the restructuring of outsourcing players & noted the fresh action brewing in this segment. All this while there is flurry of new deals getting announced and amidst an earlier near miss of a potential takeover by CSC shows that a lot more action await us ahead. Also pointed out that attention should not to be lost on the fact that private equity players are active now- meaning multiple rounds of activities involving the bought out entities would follow in due course.

TPI finds,the trend to a larger number of smaller single function contracts and the increasing use of multiple providers is creating opportunities for a wider range of providers and driving increased competition, to the benefit of outsourcing purchasers and the losers: The Big Six. TPI assessment shows that the ‘Big Six’ of outsourcing – Accenture, ACS, CSC, EDS, HP, and IBM – could see their dominance challenged, with almost $100 billion worth of major outsourcing contracts due for renewal internationally in the next two years. TPI has published interesting statistics outling the change that is happening in the marketplace:

- Big Six incumbent in 72% of the contracts to be renewed,numbering 325 deals &
representing more than 50 billion USD.
- Increasing number of service providers winning contracts : In 2005, the top 100 deals went to 34 service providers ( 2004 -29, 2003 -30)
- Decreasing trend of the big six hit rate : - 53% of the Top 100 deals in 2005, ( 2004 – 57% & 2005 – 73%)
- Offshoring on the rise: 52% of deals involved offshoring in 2005, (2004 -40%)
- Big six hit rate coming down: 37% of TPI-advised contracts involving offshoring in 2005, (2004 – 52%).
- Small contracts proliferate: 70% were small to medium sized contracts (those worth $50 – $200 million), (2004 - 65%, 2003 -61%)
- Indian service providers strike rate improving: Indian service providers have 70% strike rate and win small deals and then grow the business through additional work orders.
- Decreasing market share (large deals) of big six marketshare : 43% in 2005 ( 2004-49%, 2003 -70%)

With TPI confirming that the megadeals are unlikely to fully go away,it makes the scenario much more tough for the traditional big six and all the more reason for exploring the possibility of indian vendors potentially making a bid for a few acquisition opportunities of major outsourcing players. With more confirmations like this, the scenario is indeed possible. Most of the indian big players are said to have hired big six veterans to go after ssuch deals. An acquisition of the big players may be the final assault on the dominance of big six – but this could mean that the Indian companies may need to have a different mindset to manage –(with limited margins and more long term in their outlook).It may disrupt the traditional economics of the indian players, but nonetheless would be a move much needed in time. Certainly, I expect that one/two acquistions would be made by indian players in this space in 2006. This is possible, as adaptability and speed of operations have always characterized their growth in the last decade – the important thing is to not lose sight of humongous opportunities that lay in front and go after them as aggressively as they used to do while growing.