Clients Break Up Contracts to Break Out: A Look Ahead from the Momentum Service Line Report

As last year’s final outsourcing contract data was being tabulated, 2014 was on pace to set the record for most outsourcing contracts awarded – a record that has been broken each year since 2011.

In almost every ITO and BPO service line, contracts that bundled multiple services were losing favor to standalone engagements in which specific service lines were contracted individually, the ISG Momentum® Market Trends & Insights 2014 Service Line Report found. Clients are also increasingly carving out specific functions within service lines to contract separately, which can drive down contract values.

What’s behind these developments? ISG research in 2014 found that clients are willing to take on the responsibility of managing more relationships and contracts in exchange for the opportunity to work with best-of-breed specialists. We therefore expect in 2015 that many organizations will continue to look to outsourcing as a means to improve innovation.

The trend toward splitting work among specialist providers, or scope splitting, is especially strong in the Managed Network Services (MNS) and Application Development & Maintenance (ADM) service lines. Not coincidentally, these are areas that help fuel innovation. To take advantage of the latest and fastest networking technology, many enterprises are moving away from relying on a single service provider to deliver network services everywhere they operate.

Demand for new applications is very strong and ranges from enhancements to current business systems to new customer-facing applications and services that integrate mobile, analytics and social media. The diverse nature of this demand lends itself well to working with specialists, which has led to a sharp rise in standalone ADM outsourcing contracting. In 2011 the ratio of standalone ADM contracts awarded to those that bundled ADM with other services (such as part of a full ITO engagement) was 1.5-to-1. The ratio rose to 2.2-to-1 in both 2012 and 2013, and reached 3.4-to-1 in the first half of 2014 (full-year results are being finalized now).

This trend is just one of many data points that illustrate the growing demand for specialization and innovation. Businesses that outsource are increasingly motivated by higher-level strategic initiatives in addition to cost savings. As a result, we predict that in 2015 the industry will continue to see large contracts breaking up, contract volumes rising, and service providers being held to higher standards for agility, speed of execution and innovation.

Look for Momentum’s Annual Report due in March.

About the author

Paul Reynolds leads Momentum, a division of ISG that provides research services to help service providers better target, win and retain business. Paul has 25 years of market research experience with specific expertise in methodology development, data analytics and research process design. Having found many service providers’ Advisor Relations functions to lack appropriate analytics, Paul is working to develop innovative new approaches that allow for data-driven programs based on the unique needs of each client. His approach benefits Advisor Relations, go-to-market functions, sales, strategy, marketing, and market/competitive intelligence teams.