In the early days of outsourcing, clients signed long term contracts and with known vendors, the likes of IBM, EDS and others. Over the years, contracts underwent a lot of changes – in pricing arrangements, lengths, services outsourced and expected outcomes. “Adding value” and transformation were now considered essential to the outsourcing engagement. The debate on the success of outsourcing as an industry continues and is measured on different parameters. Arguably, two of the critical parameters are the length of the outsourcing contract and the size of the deal. And there is speculation as well as evidence that both have shrunk. Advisory firm, TPI’s quarterly index (Q4 2010) indicated that outsourcing contracts with total contract value of $25 million plus have reduced by about 10 percentage points. However, we evaluate this phenomenon from a slightly different angle. Countries such as the US and some from the European continent have been the more mature and established markets for outsourcing. Relationships with vendors have matured and we now see more multi-sourcing engagements; smaller focused contracts and therefore, tighter management of the outsourcing engagement. Does this mean the death of the large contracts? Perhaps….but we do see some large contracts being signed in emerging outsourcing destinations such as India, examples being Wipro’s deals with two large banks and IBM’s very famous deal with Bharti Airtel.

It’s relations, not size that matters

With this background, we also looked at another aspect, not completely related to the size and length of the contract, but certainly significant to the success of the outsourcing engagements.  We looked at three publicly listed companies – TCS, Zensar and Genpact - and analyzed their success with large client engagements. The number of such deals/engagement value ($5 million and $25/$50 million) may vastly differ from one company to another. However, number of big ticket clients has steadily grown in the last three years. What does this mean? This means that over the years, outsourcing contracts may have shrunk in length or value per contract, but the relationship with the client has endured. It is also heartening for the industry since these relationships have grown (in the case of all 3 companies analyzed here) and more clients added to the list.

Source: ValueNotes Research

Not such a bad deal, after all!

While mega deals (over $50 million) may have gone, smaller but significant relationships are being built with clients. Perhaps, the “penetrate and radiate” policy propagated a few years ago may have worked. Increasing traction among existing clients is the path most outsourcing companies seem to prefer and the evidence is that some of the larger companies are reporting above 90% repeat business.

 - Jui Narendran, Head – Sourcing Practice