What's The Big Deal?

This year, service providers seem to be setting their sights much lower. Case in point: Since signing a 10-year network-outsourcing deal with Bank of America valued at $4.5 billion, EDS hasn't announced a deal nearly as large. "There aren't too many out there [like that] at the moment," says Michael Boustridge, EDS' chief sales officer.

For ACS, the McDonald's deal was worth roughly $219 million over seven years to run its data center and support its 6,000 desktops, while Morgan Stanley's $575 million deal with IGS is for the management of its mainframe and server environment on a usage-based contract. Terms of the DaimlerChrysler deal were not disclosed, but it is less than $1 billion, according to Boustridge, and it's not a traditional outsourcing deal per se. While EDS will run its servers, the integrator will not take over the assets, and only a handful of IT workers will become EDS employees, says DaimlerChrysler spokesman Ed Saenz. "We will own and control the direction of the systems, but they will run them," he says.

While the large systems integrators describe these new deals as nice pieces of business, they certainly dwarf the multibillion-dollar pacts signed earlier last year and in 2002.

"There's still a lot of outsourcing going on, but the giant outsourcing deals have dropped," says Peter Lowes, Deloitte Consulting's national practice leader for outsourcing and advisory services. "[In 2002 and 2003], companies were looking to demonstrate frantic cost savings and take big, bold sweeping moves to make themselves more efficient. Since the economy has started to recover, we've seen a sharp drop-off in that kind of deal activity."

That's not to say some major deals aren't brewing. For example, Accenture won a five-year outsourcing contract with retailer Best Buy. And last month, Sears, Roebuck and Co. signed a 10-year, $1.6 billion outsourcing deal with CSC to provide desktop, server, voice and data network support, as well as systems support for Sears' Web sites and decision-support technology.

Silver Lining
Despite the fewer number of megadeals, overall business is looking up for VARBusiness 500 providers. According to VARBusiness research, overall revenue grew 3.5 percent, compared with 1.9 percent in 2002. And spending on IT services this year is forecast to grow approximately 6 percent, reaching $194.7 billion, according to a report released by Forrester Research in late April.

That there are fewer large global deals is also indicative of a shift in the way customers are deciding to acquire IT services, says Forrester analyst Christine Ferrusi Ross. Dissatisfaction with larger deals, she says, is one reason she thinks deals are getting smaller.

"When you're trying to write a contract that covers everything in your IT department, just the sheer magnitude of that means you might not be paying as much attention to the finer details of each individual sector's needs," Ferrusi Ross says.

The sweet spot for multiyear services deals is anywhere from $100 million to $1 billion. While large enterprises are still keeping a close eye on costs, other factors are prompting companies to sign services deals. In some cases, it's about making a business process more efficient; in others, it's about putting forth projects that may have been on hold that promise new revenue opportunities.

Still, reducing costs is what drives the bulk of IT outsourcing decisions, says Fred Snow, a senior vice president at ACS who negotiated the McDonald's deal. "There was clearly a requirement to reduce IT costs and concentrate on core competency but at the same time maintain consistency in their service levels," Snow says.

As part of the McDonald's deal, most of the fast-food giant's IT personnel will become ACS employees. ACS will acquire the systems assets of McDonald's and move them into its data center, consolidating servers and storage as the companies see fit. ACS will also provide help-desk support for 6,000 PCs.

Snow says the number of deals of this nature appear to be picking up. While price and service-level agreements are key denominators, the ability to develop a compatible relationship has entered into the decision-making process as well. "The contracts that are coming together are ones that are based on relationships of mutual understanding in common goals as opposed to just a transaction as a price," Snow says.

Indeed, the biggest complaint customers have with their existing outsourcing or services contracts is that providers are so focused on the letter of the contracts that they don't think out of the box, Forrester's Ferrusi Ross says.

IT service providers also need to provide more consistent and reliable services, says Tony Scott, CTO of General Motors. A longtime critic about the lack of quality standards in software, Scott would like to see his outsourcing partners become better trained and certified in implementing solutions. "Instead of walking into GM and doing a one-off design, they can walk in with a template that's proved out over time, that's repeatable," Scott says. "It's not to say this isn't happening, but it's not happening enough."

In fact, GM, which outsources almost all of its entire IT operation, has told IT partners Accenture, EDS and IGS that they need to do a better job of standardizing common IT processes, such as system provisioning.

To wit, many of the largest enterprises are looking to standardize business processes and IT architectures. Before they are willing to pull the trigger on bringing in IT services firms to accomplish that standardization, they are trying to determine how to meld business processes and IT infrastructures in a way that will make sense for both the vertical and horizontal lines of business.

"Until these concepts get going, investment will not flow," says Volkhard Bregulla, vice president and marketing director for consulting and integration at HP Services.

Give And Take
Business-process outsourcing is also having a significant impact on IT investments. Companies are farming out processes that include HR, finance and customer support. All have significant IT components to them.

For example, Hewlett-Packard recently signed a deal with telecom giant BT to take over its IT operations in Europe and Asia. In return, BT will take over HP's call centers in those regions. The deal is worth $1.5 billion, split equally.

Perhaps the most positive change of late is that slashing costs is not the only thing driving new business.

"Companies are thinking more about growth and competitive advantage again," says Accenture partner John Rollins. But, he adds, IT service providers are also under more pressure than ever to be accountable for business outcomes.

To be sure, the IT services business has been under pressure for many years, and the climate remains tough. But the good news is that it's getting better. Customers are looking at tying together their disparate systems and getting better use out of their networks, servers and storage infrastructures. And, perhaps most important, customers are more interested in talking.

"We're starting to see the pace of deals pick up," says James Graham, vice president of sales for the Americas at Capgemini. "It's a much friendlier conversation."

Carolyn A. April contributed to this story.