Both the number of IT services deals and their total contract value (TCV) declined significantly in 2017. A new report from the market research firm GlobalData says the 4,099 IT services contracts announced in 2017 represent a 26-percent decline over 2016, while the $61.4 billion in revenue those contracts generated represents a 33-percent decline.
The one bright spot in the report is that the average contract duration increased slightly (2 percent) in 2017 compared to 2016.
End of the mega deal
In terms of TCV, the report finds infrastructure outsourcing services are still dominant. The TCV for infrastructure outsourcing was $31.8 billion, with $16 billion being generated in North America, followed by Europe with $10.6 billion. The decline in TCV for infrastructure is primarily attributed to the absence of mega deals typically valued at more than $500 million compared to the previous two years.
Meanwhile, application outsourcing leads the total number of contracts signed, with 38 percent of all deals announced. That compares to 26 percent for infrastructure outsourcing, 16 percent for systems integration, 12 percent for business process outsourcing, and 7 percent for consulting.
The report also finds that the systems integration and consulting segments experienced a considerable decline in TCVs primarily because of a lack of large value deals. In comparison, nine and 15 large deals were announced in 2016.
It’s not clear whether large deals will ever rebound in the age of the cloud. Organizations of all sizes have been treating IT as an operational expense that they pay for on a monthly or yearly basis. That tends to reduce incentives to make multi-year commitments. At the same time, however, changes to the tax code in 2018 may lead more organizations to make major IT infrastructure upgrades. A significant percentage of those upgrades should theoretically create demand for larger IT services contracts.
Impact on IT services providers
Naturally, performance of individual IT services providers is going to vary widely. The overall IT services market is still measured in billions of dollars. But it’s clear that large multi-year engagements are now becoming the exception rather than the rule. That can impact everything from the number of engineers an IT professional services firm can afford to keep on staff full time to the perceived strength of their balance sheets.
In theory, cloud services contracts are supposed to be more profitable. But the GlobalData research suggests IT services providers may need a lot more customer engagements to smooth out the highs and lows between cloud services contract renewals. There’s arguably a much tighter relationship these days between the overall health of a business and the number of workloads it’s willing to spin up in the cloud. The more customers an IT services provider has, the less impact there will be from a sudden drop in the number of workloads being spun up by a handful of customers.
Of course, the fastest way to increase the overall size of your customer base is to go out and acquire another IT services provider. So, a continued decline in the number of deals as well as the size of those deals creates a recipe for consolidation. The big question many IT services providers may find themselves confronting in 2018 is to whether they want to be the company doing the acquiring or the other way around.
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