FSN: Are the “Big Six” of outsourcing an endangered species

Are the “Big Six” of outsourcing an endangered species?

30th January 2006
The “Big Six” of outsourcing, Accenture, ACS, CSC, EDS, HP and IBM dominate large scale outsourcing arrangements. As many of these contracts come up to their natural renewal dates or are subject to renegotiation, there is a suggestion that the Big Six are increasingly under threat from off-shore providers most notably, India. There are also structural changes underway such as the trend to smaller deals which could bite into the Big Sixs' share of the market. So are the large outsourcing providers an endangered species? FSN investigates.

Peter Moller, Partner, Outsourcing Advisory Services Deloitte

According to TPI, an independent advisor on outsourcing contracts, almost $100 billion worth of major outsourcing contracts are due for renewal internationally in the next two years and the Big Six are the incumbent service providers on 72% of the contract value to be renewed. History reveals that the incumbent supplier almost always wins the re-bid process and in the broad terms, the larger the contract the more likely that this is to be the case. But TPI point to new developments which could start to overturn this trend.

Increased competition from established players outside of the Big Six and a raft of new suppliers in the marketplace could present fresh challenges for the Big Six. The stakes are very high. For example, TPI's analysis reveals that 325 deals are due for renewal during 2006 and 2007, representing over a fifth of active contracts. The service providers most heavily affected are IBM and EDS, with a combined share of $50 billion in contracts coming up for renewal. The smaller the contract, the more likely it is to be competitive and the more likely that the Big Six incumbent is vulnerable.

However, other commentators are less convinced that the Big Six is threatened. They cite “structural risks” in outsourcing arrangements that shift bargaining power from the organisation to the vendor. Foremost amongst these is the handover of control and knowledge to the vendor creating a dependency that ultimately shifts power to the supplier and weakens the organisation. Furthermore, outsourcing vendors use other ‘devices' to lock in their customers to long term arrangements, such as proprietary systems which makes it extremely difficult to switch vendors.

One of the ways in which organisations can reduce their dependency on outsourcing organisations is to mange more effectively their relationship with the vendor. A report launched at the end of last year by the Warwick Business School highlights the increasing importance of good governance in securing successful outsourcing outcomes. Professor Leslie Willcocks, the report's co-author says that CEOs who fail to actively manage outsourcing relationships miss out on a 'trust dividend' worth up to 40 per cent of contract value. On the other hand, well managed outsourcing arrangements based on mutual trust, can create a 20 per cent to 40 per cent difference on service, quality, cost and other performance indicators compared to outdated power-based relationships. An important element of successful outsourcing relationships is to ensure that the right people are in place to make them work, finds the study.

If restoring the balance in outsourcing relationships is fundamental to the performance of outsourcing contracts then well managed contracts could well be one of the factors which will operate in favour of the Big Six.

However, relationship management cannot be relied upon to restore the balance in outsourcing arrangements. This, is one of the reasons that organisations are attempting to negotiate shorter-term and more flexible contracts. They are also working with multiple vendors as a way of defraying the risks associated with outsourcing.

The trend to smaller contracts is the Achilles Heel of the Big Six. Data provided by TPI says, 293 contracts were signed in 2005, more than in any other year. Of these 70% were small to medium sized contracts (those worth $50 – $200 million), up from 65% in 2004 and 61% in 2003. Whilst Indian providers rarely win deals over $200 million, below this threshold, in 2005 they were invited to pitch for 30% of contracts and went on to win 70% of these.

Peter Moller, partner in charge of UK outsourcing advisory services, at Deloitte, the accounting and consulting firm, told FSN, “The situation in India is changing the dynamics of the BPO outsourcing market. Big Six outsourcers in Northern Europe have struggled to achieve good margins and provide a good return to customers but the low cost base in India has changed the economics of the situation.”

“I'm seeing three major developments,” says Moller. “The Big Six outsourcers are developing their own capability in India to reduce costs. Secondly there are large Indian organisations, such as Wipro, Infosys and Tata that have significant resources and are now reaching out to the US and Europe . Thirdly, there are large multinationals, such as British airways and HP that have set up ‘captive' operations for themselves and are now commercialising their operations to compete in the wider market.”

TPI's anlysis supports Moller's view. 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 to the further detriment of the Big Six. 34 different providers signed Top 100 deals in 2005, up from 29 in 2004 and 20 in 2003. The Big Six won only 53% of the Top 100 deals in 2005, down from 57% in 2004 and 73% in 2003.

Similarly, the Big Six's market share of major outsourcing contracts (those valued at over $50 million) fell to 43% in 2005, down from 49% in 2004 and over 70% back in 2003 and 2002. 20 service providers signed four or more major contracts in 2005, up by a third from 15 in 2004 and part of a steady upward trend.

Duncan Aitchison of TPI says, “When the Big Six and the Indian providers go head-to-head it typically occurs on smaller deals. Indian suppliers have been extremely successful in winning these deals and then growing the business through additional work orders.”

Whilst the market is undoubtedly going through rapid changes and the Big Six appear vulnerable because of competition, they are still in a dominant position and are taking active steps to counter the threat from indigenous Indian providers. Moller says the market is now ripe for consolidation. “There are at least a dozen players in the first division of outsourcing and around another dozen closely behind them,” he says. Rather than lose market share, one possible outcome is that the Big Six may simply swallow up the competition.

About Us