Record number of restructured IT contracts highlights buyers' drive for alignment and best price, says expert

A new report by technology market analysts Information Services Group (ISG) found that 115 IT outsourcing contracts were restructured across the global market between the beginning of July and end of September this year, up from 57 for the same period last year. 

The figure represents a record number for IT outsourcing contracts that have been restructured during a single Q3 period for all the comparative data ISG has compiled since 2004. The annual value of the restructured contracts finalised during the period was €2.1 billion, which topped the previous comparative Q3 record of €2bn in 2011. 

IT contracts expert David Barker of Pinsent Masons, the law firm behind Out-Law.com, said: "Restructuring and renegotiation is absolutely front of mind for customers, and therefore also for suppliers, and that continues even as the economy improves. Buyers are looking to change the scope of contracts and make the supply more relevant to what their business looks like today.  At the same time they are addressing other issues such as pricing competitiveness." 

In the summer ISG said that the number of outsourcing contract renegotiations could reach an "all time high" in 2013 after identifying 886 active contracts it said were due to expire during the year. At the time ISG said it expected IT outsourcing contracts worth $15.5bn to be up for renegotiation this year. 

According to the latest ISG report, the total value of all IT and business processing outsourcing contracts finalised in Europe, the Middle East and Africa (EMEA) during Q3 was €2.8bn. This represents a record for any previous comparable Q3 period going back to 2004 and was "driven by nine mega-relationships and very high contracting activity", ISG said. 

Barker said, though, that so-called 'mega deals' are becoming less popular with some IT buyers, and that this too was reflected in the ISG figures which showed a record number of IT outsourcing contracts were awarded with EMEA in the quarter and the second highest total values recorded for a single quarter ever. 

"As well as mega deals there are a very substantial number of contracts with a lower value attached to them and this reflects a general market trend, particularly in the public sector, away from major, long-term contracts with single suppliers to buyers seeking lower value, more tactical contracts," he said.  "These lower value contracts are sometimes motivated by the customer wanting 'best of breed' for each service they buy, rather than buying everything from one of the biggest players. In other cases lower value contracts show that customers are looking for quick wins rather than something complex, sophisticated and risky." 

Despite the upturn in the market recorded by ISG's figures, Barker predicted that there could be further market consolidation on the supply-side. This would be driven primarily by the continued "downward pressure on pricing", he said. 

According to separate figures published by corporate finance firm Regent Partners, mergers and acquisitions (M&As) within the European technology, media and telecoms (TMT) sector grew by 7% during Q3 relative to the second quarter of 2013, and by 5% relative to Q3 in 2012. It said that the value of the M&A deals during Q3 was $78bn. 

In the UK market, the number of M&As involving software and IT service providers peaked at its highest level in Q3 since Q4 in 2006, a report by Tech Market View, citing Regent's figures, said.