With offshore service providers applying pressure on billing rates for systems integration and consulting work, economies of scale are increasingly important if services companies are going to be able to handle projects profitably. But there is still room for small and medium-sized services providers.
Despite the apparent focus on size and scope of major IT services providers in recent years, there is a growing trend for clients to work with a number of best-of-breed or niche suppliers on large contracts. Likewise, big services vendors are subcontracting work to smaller parties to fill in the gaps where their own expertise falls short.
Multi-source contracts are becoming increasingly popular due to the greater flexibility they give the client. The difficulty of changing single outsourcing suppliers means that 95% of outsourcing contracts are re-signed with the original supplier, which typically owns the relationships with essential subcontracted partners. However, multi-sourcing enables the customer to pick and choose the different members of a consortium to provide outsourced services.
In the US, a certain percentage of the value of large federal government IT services deals has to go to small and medium-sized businesses. This trend is also on the increase in the UK after the government had its fingers burned on several major projects given to a single supplier.
A quick glance at some recent deals shows that multi-source and subcontracted deals are on the rise. The Royal Mail has awarded a $2.4 billion contract to outsource its IT infrastructure to a consortium of CSC, UK-based Xansa and BT Ignite. Hardware maintenance and business continuity services provider Synstar and server management specialist Itnet have both secured multimillion-dollar, multi-year deals as subcontractors to CSC, and managed network service provider Vanco has just won its largest contract to date as a subcontractor on one of CSC's large international outsourcing deals.
Despite the tough market conditions, there is still a role for small and medium-sized IT services providers outside the top tier. Clients are looking for greater flexibility and focus on outsourcing deals, and the real winners of this trend will be project managers whose skills will be at a premium for handling multiple supplier relationships.
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