Defense contractor BAE Systems’ recent agreement to outsource IT operations to provider CSC for another five years illustrates the changing nature of outsourcing arrangements. The deal, valued at $600 million, extends the IT outsourcing relationship the two companies began in 1994.
The most recent outsourcing deal between BAE Systems and CSC is valued at $600 million, less than one-third the size of a similar five-year deal struck in 2005. Companies don’t release details about such contracts so it’s impossible to know if the scope is comparable. Analysts say, though, that the decrease is emblematic of what’s happening across all outsourcing contracts.
“All deal sizes are declining,” said David Tapper, vice president of outsourcing and offshoring services at IDC.
The value of worldwide outsourcing deals has fallen over the past decade, according to Mr. Tapper. In 2005, the average deal size of the top 100 outsourcing deals globally was $680 million and in 2015, it fell to $392 million, he told CIO Journal. IDC has tracked the outsourcing market for more than two decades and maintains a database containing more than 60,000 deals.
CSC began outsourcing at a time when the margins were higher, there was less competition, less automation and less offshoring of work, said Bill Huber, a managing director of global outsourcing advisory firm Alsbridge, Inc. “As those deals came up for renewal, often they’d be re-priced at anywhere from 50% to 75% of the current deal value for those companies,” he told CIO Journal, Friday. Part of that decrease was due to increasing competition from global providers based in India and elsewhere.
Outsourcing companies such as CSC face a challenge when contracts come up for renewal in replacing the revenue they’ll lose. “It’s going to be hard to keep those same agreements at the same revenue, so they need to figure out a way to increase scope and provide other value-added services,” he said.
Because BAE Systems is a defense contractor and there are rules about where work can be performed, said Mr. Huber. There are also security controls about what can be automated and what can be moved to the cloud. “It’s a more limited group of providers who can do the service and it’s a higher cost to switch,” he said. That means that BAE Systems may not be seeing as steep of a savings as companies in industries that don’t have such limitations.
Both BAE Systems and CSC declined to comment.
BAE Systems first signed a 10-year $1.5 billion IT outsourcing contract in the UK in April 1994, CSC said in a May 2006 press release. Over that 10 years, the relationship was expanded to support multiple mergers and acquisitions in both the UK and the U.S.
Deals between the two companies forged since 2011 show a steady decline in total deal value. In May 2005, the two companies struck a five-year deal valued at approximately $1.9 billion. That included a full-range of IT operations from mainframe and midrange computers, servers and desktops to networking, Internet services, help desk, applications development and support and procurement services. In November 2011, the two companies said they’d signed a new 5-year-agreement worth up to $160 million per year, or $800 million total.
Under the new $600 million agreement, which expires in November 2021, CSC will provide a range of IT services including contact center, collaborative services, end user computing, mainframe, physical and virtual servers, storage and networking, project services and application maintenance and support. CSC said May 17 in a released statement.
With the new deal, CSC will deliver new efficiencies through automation. The provider will also introduce new capabilities into an expanded scope across infrastructure, applications and project services.
“We operate in a constantly evolving industry with a need to improve operational service and reduce operational expenditures,” said Allan Leggetter, IT director at BAE Systems in the released statement.
Outsourcing firms have begun to use software to automate repetitive tasks. This so-called IT robotic process automation market is expected to jump to $4.98 billion by 2020 from $183 million in 2013, a compound annual growth rate of 60.5%, according to Transparency Market Research.
A software bot costs about one-third the price of an offshore full-time employee, said Frank Casale, chairman emeritus of the Outsourcing Institute, who co-founded a professional association called the Institute for Robotic Process Automation. As labor arbitrage has run out of steam, automation is the next frontier for outsourcing companies that want to improve their profit margins.
Corporate customers will be expecting discounts too. “Firms expect to save 20% with automation,” said Mr. Tapper.