Outsourcing: middle market top source of growth.

It's hardly surprising that the global outsourcing market is growing sharply, but the source of that growth isn't quite as predictable as you might think.

New research by independent market analyst Datamonitor and outsourcing advisory firm Everest Group reveals the global outsourcing sector is increasingly being driven by mid-size contracts--particularly in the fast-growing business process outsourcing (BPO) space. Datamonitor's IT Services Contract Tracker tracked 1,814 outsourcing deals in 2004, a 4.4 percent increase from 2003, with a combined value of $163 billion, up 37 percent from the $118.9 billion of 2003.

The survey also found a 39.8 percent drop in the average contract value for pure BPO deals. This decline in average value, Datamonitor says, was driven by a 51 percent rise in the total number of deals in the $20 million-$200 million range; there were almost six times as many deals in that range as the $200 million-plus range.

Michel Janssen, President of Supplier Solutions for Everest Group, also noted that for the first time, mid-to-large transactions and not large-to-very large businesses dominated human resources outsourcing. "2005 will be the year that BPO goes mainstream, and it will be driven by mid-size client organizations," companies with between 5,000-25,000 workers, Janssen said.

In other findings, there were fewer mega-billion-dollar deals in 2004 than in 2003 (25 versus 29). This seems to tally with the belief of many in the services sector that clients are adopting selective sourcing models, in which they outsource specific IT and back-office functions to specialist vendors rather than hand over their entire IT department to a single supplier.

Another finding: 2004 deals were distributed among a larger number of vendors than in previous years. The 10 vendors with the largest single market shares of the contracts tracked in 2004 by value accounted for 57 percent of the total, down from 68 percent in 2003 and 70 percent in 2002. IBM Global Services captured the largest market share (10.7 percent), with deals signed in the central government sector growing 78 percent during 2004.

Datamonitor reported increasing competition from a variety of firms like Affiliated Computer Services (ACS), Hewitt Associates and Perot Systems that are beginning to win deals that were traditionally won by top 10 outsourcing vendors. "Looking further down the road," the firm added, "we are also seeing the top-tier offshore vendors such as TCS, Infosys and Wipro compete, and win, in head-to-head deals against top-tier Western vendors--and the wins are increasingly larger in size."

Outsourcing Deals Rise

2003
Deals:  1,738  Value:  $119 billion
2004
Deals:  1,814  Value:  $163 billion

Source: Datamonitor, Everest Group