Mega-Deal outsourcing, the complete transfer of information systems and business processes to be managed by a single provider, is dramatically fading in popularity due to changes in client behavior and needs. Mega-Deal outsourcing contracts have proven to be successful for the last 20 years; however, due to a lack of service flexibility and control by the customer, major corporations are now seeking alternative solutions.

Alsbridge, a global outsourcing, shared services and offshoring advisory firm, voiced the opinion that the recent wave of mega-deal terminations is based on the failure of outsourcing firms to adapt and seek out new delivery models to manage their client relationships.

Corporations need to ask: Is outsourcing as we know it dead? What shape will future mega-deals take given the range of low cost offshore labor that can be engaged directly by US-based companies? Is there a relationship structure that gives the client control and access to changing resource needs that will bring the customer back to the outsourcing provider?

“The sinking of these large deals is rooted in a fundamental change in client behavior and a shifting labor pool,” said Ben Trowbridge, CEO of Alsbridge. “Clients want access to a variety of providers and technologies, immediate advantage of offshore labor options, and emerging technologies. In many cases, the outsourcing providers have been slow to change, relying on terms negotiated years ago to protect their onshore investments and profits.

Compounding this problem is the willingness of clients to bypass the outsourcing provider and offshore a function, such as IT, accounting or HR, by using their own management team to establish their own offshore Captive Skill Center Operations (CSCOs)”. The ease of skipping the outsourcing providers and seeking company owned and managed offshore solutions is a key tipping point change. Reportedly 3 out of 4 jobs currently moving offshore are not outsourced.

As a result, Alsbridge believes that the future of large outsourcing contracts will morph into a hybrid form of sourcing that will take advantage of these trends and give the client maximum control. Alsbridge has defined this trend as Joint Venture or JVSOURCING, which allows companies to share goals, mitigate risks, and reap the same rewards by creating special purpose joint ventures with outsourcing firms. The depth of industry experience and skill required to negotiate and structure this innovative model exceeds the capabilities of most outsourcing teams.

Outsourcing contracts that have utilized various attributes of JVSOURCING include: OneResource Group created by Dairy Farm International in the late 1990’s, One Systems Group, Synergis, TASCO, and most recently TXU who formed a venture with a mid sized outsourcing firm earlier this year. Although the current state of Mega-Deals veers towards the outsourcing casualty list, an exception to this fact lies with the original creation of Systor AG, which was far different than its peers. Unlike the deals between IBM & JPMorgan and General Motors & EDS, Perot Systems & Swiss Bank formed a Joint Venture company (Systor AG) that was said to be highly successful and lucrative for both parties.

Only after the dynamics of this structure changed and it evolved into a pure outsource play, did the contract begin to move to termination. Utilizing elements of past Mega Deals combined with the future JVSOURCING structure will confirm that maintaining successful long-term relationships requires jointly owned and managed ventures under a JVSOURCING type framework.