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Outsourcing’s Deflategate: Why Is the Air Being Taken Out of Outsourcing Contract Size?

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by Jim Kane

Since January, Tom Brady and the New England Patriots of America’s National Football League have come under fire for their involvement in the “Deflategate” scandal. But the under-inflated “pigskins” Brady apparently tossed in the AFC Championship game aren’t the only things that have had the air taken out of them. So have outsourcing contracts.

The recently released 2Q15 ISG Outsourcing Index™ shows outsourcing contract volumes at record highs but the length and value of contracts on the decline. What are the reasons for this new trend?

Here are the Top 5 reasons the air is being taken out today’s outsourcing contracts.

1. Enterprises are waiting and seeing. Numbers and experience show organizations are shying away from long-term outsourcing contracts. The truth of the matter is leaders simply cannot predict the speed at which emerging technologies are coming to market. They are more and more willing to bide their time and forego a long-term contract to take advantage of potential new productivity gains and revenue opportunities that come with the latest advances of the digital age.

2. Leaders can’t afford to miss the boat on automation. Rapid advancement in software that automates many back-office processes is setting off a similar chain of events. Enterprises are shifting away from large, full-tower contracts to functional, out-tasking contracts so they can achieve very industry-specific and technical outcomes.

3. The information technology outsourcing (ITO) contract of yore is splitting apart. In the ITO environment, we continue to see a separation of Application Development and Maintenance (ADM) services from Infrastructure services. The fact is, the demand and speed required of the application teams in developing new business functionality outpaces the demand on Infrastructure resources. This, in part, is why companies are signing many smaller, lower-valued contracts with many specialized service providers.

4. Sourcing sophistication is on the rise. Many organizations are in their second or third generation of sourcing and have become seasoned and experienced buyers. These kinds of clients are more likely to shop out contracts for the best-of-breed service provider. To accomplish this, they are willing to undo larger contracts when they come to term.

5. Service integration: everyone’s doing it. Service Integration and Management (SIAM) is a model that helps organizations assess, design, build and operate service delivery organizations based on process excellence and development of human capital. This new capability for cross-functional integration means they can effectively manage business requirements (demand) as well as service delivery (supply). Enterprises are increasingly apt to create a sourcing complex that exercises it.

Will the air get pumped back into sourcing contracts? Or will they change shape altogether? The demands of the digital era—the need for flexibility and agility—may very well create contracts made for a whole new game.

ISG provides data and insight into outsourcing trends and helps enterprises see around corners. Contact me to discuss further.

About the author

Jim has in-depth experience in assessing and managing complex IT Infrastructure engagements focused on helping corporations achieve their business objectives. He offers expertise in strategy assessment and development, statement of work, service level agreements, business-driven RfP development, transactions, contract negotiations and transition planning across IT Infrastructure areas and expertise in IT service management integration. Jim has worked with global enterprises in the automotive manufacturing, banking and financial services, healthcare, utilities, aerospace and retail industries, focusing on collaborative techniques with clients and service providers to achieve the desired business outcomes. He recently led the negotiation of a large infrastructure contract with a utilities company and a cloud computing transition. Included in this successful project was the development and execution of the sourcing strategy, assessment and transaction process and project management, negotiation strategy development and financial proposals and executive leadership communication. Jim is ITIL V3 Foundation certified and a thought leader on the topic of the digital workplace.