Research Brief IT Outsourcing Contracts: Crunching the Numbers Abstract: The average annual value of an IT outsourcing contract is $47 million and the average duration is six years, according to an analysis of 1,055 contracts awarded over 14 years. By Bruce Caldwell Recommendations Enterprises and outsourcers should develop historical databases of contract awards relevant to their specific objectives, markets and industries. Contract database analysis should be understood as a strategic guide, not a tactical guide, because of the impossibility of obtaining exact data on all contracts. Enterprises can enhance contract negotiations and outsourcers can enhance competitive positioning via contract database analysis. Publication Date: 17 April 2003
2 IT Outsourcing Contracts: Crunching the Numbers Introduction The IT outsourcing market is about 30 years old, dating back to early time-sharing arrangements for mainframe computer processing power. The market leaped into the spotlight in the early 1990s when major corporations began signing contracts worth hundreds of millions and then billions of dollars. While contracts with large dollar values frequently draw heavy publicity, the vast majority of IT outsourcing contracts are not publicly announced. According to a Gartner Dataquest survey of end users that outsource, only 12 percent of contracts are announced. Public disclosure of contracts is generally limited to some of the following circumstances: The outsourcer is interested in gaining publicity and references and may provide incentives or compensation to the enterprise client for resources used in responding to inquiries. The enterprise expects substantial cost savings or competitive advantage to result and wants to inform the investment community. Regulations require public disclosure because the size of the savings, asset transfers, total contract value or other financial aspects of the contract is so substantial as to have material impact on corporate earnings. Regulations require public disclosure of contracts, regardless of value, when the public good is served, as in contracts awarded by government agencies. Most contracts will not meet these criteria and will remain undisclosed becauseofsomeofthefollowingfactors: The enterprise does not wish to have it known that it needed the particular service, used the particular service provider or committed to spending the contract value. The outsourcing provider does not want competitors to know that a particular enterprise has adopted an outsourcing strategy. The nature of the outsourcing service is either too commonplace or too risky, in the opinion of either or both the enterprise client and outsourcing provider. The number of known IT outsourcing contracts is adequate for analysis of general trends but is not sufficient by itself for detailed, tactical findings or trends. Gartner Dataquest surveys of enterprise end users and vendors, as well as secondary research and other sources, are necessary to realize the full value of the database. The contract database is used to respond to inquiries from Gartner Dataquest clients and is used for various Gartner Dataquest reports. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 17 April 2003
3 Methodology Gartner Dataquest has compiled data on 1,055 IT outsourcing contracts awarded since 1988. At a minimum, all of these contracts publicly disclosed their dollar value and the duration, as well as the nature of the services, and the name of the client and the outsourcer. Gartner Dataquest defines IT outsourcing as a multiyear contract/relationship involving the purchase of one or more IT services, but always including one of the IT management services. IT management services include operational services, applications management and help desk management services. Asset transfer (technology or employees) may be included. The IT outsourcing contract database includes all contracts with at least one of the IT management services (application management, operations services and help desk management). These contracts frequently include many elements of the other IT services (product support, consulting, and development and integration). Contracts that are substantially for process management services were excluded. No changes in total or average annual contract value were made as a result of early contract terminations. Contract renewals, extensions and expansions are reflected if they were announced. In addition to the above limits on contracts analyzed for this report, the following should be noted: Large contracts, in the hundreds of millions or billions of dollars in value, are more likely to be publicly disclosed than smaller contracts because of the impact of the dollar value on the outsourcer and the client. Contracts with government agencies are matters of public knowledge and may be overrepresented in the database. Not all marketing departments in outsourcing companies were created equally. Some outsourcers are clearly more effective than others at publicizing significant contract wins. Most of the contracts were publicly announced in the United States. Overseas contracts of significant size sometimes received publicity in the United States but were more likely to receive publicity if the client or outsourcer were headquartered in the United States. Gartner Dataquest is collecting contract announcements on a worldwide basis. The database contains several thousand additional contracts that were not included in this document's analysis. These additional contracts are for consulting, development and integration, business process outsourcing and other services. The database also has additional IT outsourcing contracts that do not contain the dollar value and duration, and in some cases,donotnametheclientortheoutsourcer.thesewerealsonot included in our analysis. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 17 April 2003
4 IT Outsourcing Contracts: Crunching the Numbers The contract database has been used in the past to create tables of significant deals in Gartner Dataquest Market Trends reports and has also been available to answer client inquiries. Demographics The demographics of the IT outsourcing contract database presented in this report represent only contracts in which the dollar value, duration in years, and name of the client and outsourcer were publicly disclosed. The demographics are generally representative of the market, with some exceptions in which contracts may be overreported or underreported. Among the 1,055 contracts, deals worth less than $100 million each are the most numerous, representing 54 percent of the total. However, these deals amounted to just 4 percent of the $389.2 billion total value of the contracts in the database. "Megadeals," those worth $1 billion or more, are just 9 percent of the 1,055 but represent $253.7 billion, 66 percent of the total value(seefigures1and2). Figure 1 Distribution of Contract Value Segments by Number $1B or More (9%) Between $100M and $999M (37%) Less Than $100M (54%) 114283-00-01 Source: Gartner Dataquest (April 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 17 April 2003
5 Figure 2 Distribution of Contract Value Segments by Total Value Less Than $100M (4%) Between $100M and $999M (30%) $1B or More (66%) 114283-00-02 Source: Gartner Dataquest (April 2003) Figure 3 shows the distribution of contracts across 14 industries. Among these, government (central and local government combined) and financial services represent the largest percentage of all contracts analyzed at 33 percent and 16 percent, respectively, followed by manufacturing (9 percent), travel and transportation, and telecom (each at 7 percent). The auto, aerospace/defense and high-technology industries were broken out from manufacturing because these sectors are of particular significance to the outsourcing market. Both sectors are early adopters and also award some of the largest outsourcing contracts. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 17 April 2003
6 IT Outsourcing Contracts: Crunching the Numbers Figure 3 Distribution of Contracts Across Vertical Industries Auto (2%) Utilities (2%) Aerospace/Defense (3%) Services (4%) Energy (3%) Retail (4%) Central Government (22%) Healthcare (5%) High Tech (5%) Telecom (7%) Financial Services (16%) Transportation (7%) Manufacturing (9%) Local Government (11%) 114283-00-03 Source: Gartner Dataquest (April 2003) In addition to looking at contracts by industry, Gartner Dataquest compared the contracts with the Fortune Global 500 list, as compiled by Fortune magazine (22 July 2002 issue). The Fortune Global 500 lists the world'slargestcompaniesbyrevenue.someofthekeyfindingsofthis comparison are as follows: More than 113 of the Fortune Global 500 have or have had a publicly announced IT outsourcing contract from 1988 through 2002; at least seven of the Fortune Global 500 are known to have outsourced but have not disclosed terms. Among the Fortune Global 500, the database shows that at least 205 contracts among the 113 companies have a total value of $205 billion, or 53 percent of the total contract value in the database. Forty of the Fortune Global 500 have combined IT outsourcing contracts worth from $100 million to $999 million, totaling $15.6 billion; 47 of the Fortune Global 500 have combined IT outsourcing contracts worth $1 billion or more for a total of $188.7 billion. The Fortune Global 500 ranks include 22 IT outsourcers, many with substantial contracts among themselves, such as IBM and AT&T, and EDS and MCI. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 17 April 2003
Penetration of the Fortune Global 500 by IT outsourcing is highest at the top, with nine of the top 10, and declines steadily through the ranks until 300, where it appears to level off, with only 14 companies or 12 percent each in the 301 to 400 rank and the 401 to 500 rank (see Figure 4). Figure 4 Distribution of Contracts Across the Fortune Global 500 7 Global 401-Global 500 (12%) Global 301-Global 400 (12%) Global 100 (30%) Global 201-Global 200 (20%) Global 101-Global 200 (26%) 114283-00-04 Source: Gartner Dataquest (April 2003) Within the first three months of 2003, the following three megadeals among the Fortune Global 500 were publicly announced: Fortune Global 500 No. 30, AXA, in a six-year, $1 billion contract with IBM Fortune Global 500 No. 138, Motorola, in a 10-year, $1.6 billion contract with CSC Fortune Global 500 No. 278, Visteon, in a 10-year, $2 billion contract with IBM Finally, the representation of outsourcers among the contracts analyzed for this report appears roughly representative of the market (see Figure 5). For example, IBM and EDS both have outsourcing market shares in the teens, while all other outsourcers have market shares in the single digits. The 12 vendors named in Figure 5 have more than 20 contracts each in the database. In all, the database has contracts awarded to 140 vendors. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 17 April 2003
8 IT Outsourcing Contracts: Crunching the Numbers Figure 5 Distribution of Contracts Across Outsourcing Vendors EDS (15%) Others (33%) CSC (15%) Fujitsu (2%) ACS (2%) CGI (2%) CGE&Y (2%) AT&T (2%) Lockheed Martin (2%) Accenture (3%) Unisys (5%) Hewlett-Packard (5%) IBM (12%) 114283-00-05 Source: Gartner Dataquest (April 2003) These demographic findings reflect the publicly announced contracts that provided value and terms, services, and client and outsourcer names and that were included in the database. The next section of this report will examine the conclusions that may be drawn from analysis of the sample represented by the database. Average Annual Contract Value and Other Findings Gartner Dataquest divided the total announced contract value by the term of years to derive the average annual contract value. This yielded several measurements and guides, as follows: The average length of IT outsourcing contracts is six years. The average annual IT outsourcing contract value is $47 million. On average, 7 percent of all IT outsourcing contracts will come up for renewal in any given year. With respect to the renewal rate, user and vendor surveys and other dataindicatethefigureismuchhigher,perhapsasmuchas20percent. As seen in Figure 6, the top five vertical industries in terms of average annual contract value are aerospace/defense ($88.2 million), automotive ($87.4 million, not including a $40 billion, 1996 master contract between General Motors and EDS), high tech ($80.5 million), telecom ($79.9 million) and financial services ($49.6 million). 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 17 April 2003
The industries with the largest average annual contract value are also the most active in terms of megadeals, contracts worth a total of $1 billion or more. Financial services boasts at least 17 megadeals, a number matched only by central government (which, however, does not have a high average annual contract value because of the large number of publicly known smaller contracts in central government), while telecom has 12, transportation 11, manufacturing and aerospace/defense each have eight, and high tech has seven. Figure 6 Vertical Industries by Average Annual Contract Value 9 Aerospace/Defense Auto High Tech Telecom Financial Services Central Government Transportation Services Manufacturing Energy Retail Healthcare Utilities Local Government Higher Education 0 10 20 30 40 50 60 70 80 90 Millions of Dollars 114283-00-06 Source: Gartner Dataquest (April 2003) Gartner Dataquest Perspective Tracking IT outsourcing contracts over time can yield some useful guidelines and measures, such as the average number of years for contracts (six), the average annual contract value ($47 million) and the average percentage of contracts up for renewal each year (7 percent). You can also get a sense of the adoption rate for IT outsourcing by vertical industries and companies by revenue, as well as the success rate for outsourcing providers among the industries and company size ranges. Knowing what companies and outsourcing providers have and have not done in the past can help identify pockets of expertise, as well as pockets of opportunity. For example, it may be clear that a vendor has consistently won business in several vertical industries, and so may reasonably be expected to have expertise in serving those industries. An outsourcing provider with no or only a few small contracts in an industry may be seeking a large contract with a company in that industry to increase its competitiveness. An enterprise might find that the latter outsourcing 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 17 April 2003
10 IT Outsourcing Contracts: Crunching the Numbers provider would be more open to concessions and innovation than a more established provider in that industry. Outsourcers may find that contract databases will assist them in identifying strengths, weaknesses, opportunities and threats for themselves as well as their competition and partners. Tracking the outsourcing contracts of companies over time can help develop behavior profiles useful for analyzing vertical industry markets and specific companies. These profiles can prove informative for both enterprisesaswellasoutsourcingproviders. Outsourcers should also view contract analysis as a means to balance their own risk exposure, assist in investment and asset planning, and to guide their service offerings development. Enterprises would do well to track the contract activities of established and prospective outsourcing providers to: Help manage risk in terms of vendor financial exposure, security, resource requirements, pricing, management, contracts with close competitors Obtain data for negotiation on service levels, pricing, requests for additional or new services Know the behavior of other companies in same industry or revenue range Outsourcing providers should track their own contract activity as well as that of competitors to: Manage risk exposure and resources Identify opportunities Understand trends and issues and marketplace behavior Outsourcers may find that contract databases will assist them in identifying strengths, weaknesses, opportunities and threats for themselves, as well as their competitors and partners. Tracking the outsourcing contracts of companies over time can help develop behavior profiles useful for analyzing vertical-industry markets and specific companies. These profiles can prove informative for enterprisesaswellasoutsourcingproviders. Outsourcers should also view contract analysis as a means to balance their own risk exposure, assist in investment and asset planning, and guide development of their service offerings. Key Issue What are the market sizes and forecasts for the outsourcing industry? 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 17 April 2003
2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 17 April 2003 11
12 IT Outsourcing Contracts: Crunching the Numbers This document has been published to the following Marketplace codes: ITSV-WW-DP-0491 For More Information... In North America and Latin America: +1-203-316-1111 In Europe, the Middle East and Africa: +44-1784-268819 In Asia/Pacific: +61-7-3405-2582 In Japan: +81-3-3481-3670 Worldwide via gartner.com: www.gartner.com Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice. 114283