Much has been said and written about the dramatic and disruptive change that the IT industry is undergoing today. Indeed, several posts on this blog have talked about various aspects of these changes from the benefits of big data and the enablement of secure BYOD to the potential demise of traditional IT services
Another aspect of this change is the falling popularity of the megadeal – that is deals in excess of $1 billion total contract value, according to industry analyst Gartner Inc. In their report, ‘Outsourcing Trends, 2011-2012: Exploit Opportunities from the Evolution of Contract Structures’, Gartner recorded just three megadeals globally last year compared to 15 at the peak of the trend in 2003.
Why are businesses moving away from the megadeal?
As is often the case, it is not one but a number of intersecting cultural, commercial and technological factors that are not so much driving the move from megadeals as influencing the move towards smaller, shorter contracts.
- There is a significant shift to online commerce that has massively increased competition in many markets making established IT sourcing models increasingly obsolete.
- Many procurement departments harbour negative views of ‘lock-in’ and a perceived lack of value and innovation associated with single source mega-deals.
- There is a parallel perception that one supplier cannot be the best at everything and that an overall higher quality of service can be obtained from separate tower providers
- Cloud providers are enabling the business to procure IT services without going through the IT department and, in some cases, procuring more efficient service than the IT department could deliver.
- Technologies such as broadband, Smartphones, iPads, video-conferencing, etc is leading to a wider, more complex network of service providers.
- And finally, there is, of course, the continuing and relentless drive to more cost effective services without sacrificing quality.
When they have worked well in the past, the long-term megadeal allows a relationship of trust and collaboration to build. Your business benefits from your service provider’s deepening knowledge and understanding of your corporate culture and, in the right contractual environment, innovation can spawn and the outsourcing relationship moves from that of a supplier to a business partner.
Conversely, when talking about the downside of the megadeal contract, a relationship that goes sour can go very sour. There are well documented, high profile cases of multi-billion dollar outsourcing contracts ending up in acrimonious court battles instead of harmonious, business-winning service provision – underlining the fact that extrication from long-term, high value deals is needless to say, messy, costly and potentially damaging to the reputation of both business and service provider.
Also, as a rule, the higher the contract value (ie: the greater the scope of the service), the more limited the potential suppliers become. Very few, if any, small outsourcers can scale to provide a true global multi-tower ITO service.
There is one emerging and fast becoming constant truth about the trend towards smaller and more numerous IT deals. That is the importance of strong and coherent governance.
A multi-sourcing lives or dies by the strength of the governance. Whether that is contractual, commercial or service governance, it needs to be:
- Thoroughly defined in scope,
- Well managed through effective service and operational level agreements, and
- Strongly supported at executive level and down both the client and service provider organisations.
Strong governance and a properly aligned service provision model will ensure that the “one throat to choke” / “one back to pat” ethos of the megadeal years still prevails while the more agile multi-sourced environment can ensure a steady supply of ‘best of breed’ IT service providers targeted at delivering according to your business priorities on that day.
So – to answer my original question - what replaces the megadeal?
- Undoubtedly, shorter-term, lower value deals.
- Aggregated Services, integrated into the IT framework so businesses will increasingly move to ‘pay as they go’/ ‘as a service’ solutions (focused primarily on the business goal)
- New entrant service providers, in this time of hyper-competition, many niche services will emerge. However, not all will prosper. There will be more volatility in the market, not the IT service.... providers will be switched on and off with ease; less time to establish trust and familiarisation.
- More innovation? Probably, providing the right balance is struck between delivering on service levels and collaboration.