London--New research by independent market analysts Datamonitor, and leading outsourcing advisory firm Everest Group has found that the average deal size in the $600bn global IT and BPO services sector is shrinking. Based on figures from Datamonitor's "IT Services Contracts Tracker," the average size of contracts announced by IT and BPO services vendors in the first quarter of 2005 fell 18% to $68.9m compared to the year ago period. This means that average deal size has now declined for three consecutive quarters.

Datamonitor's "IT Services Contract Tracker," is the most comprehensive and up-to-date guide for contracts within the global IT services market. The service tracks every new outsourcing, systems integration and consulting deal with a value greater than $1m signed by major IT services vendors, and contains information on more than 6,900 contracts signed during the last five years.

A total of 456 IT services contracts were announced during the first quarter of 2005, worth a combined total of $31.4bn. This represents a 13.7% decline on the first quarter of 2004 where the total value of contracts reached $36.4bn.

The number of contracts tracked in Q1 2005 was up 5% on the 435 recorded in the year-ago quarter, but the fall in average deal size suggests that clients are signing smaller, more focused deals with suppliers.

Nick Mayes, lead analyst for Global Computing Services at Datamonitor, noted: "The decline in average deal value is partly due to the rise of multi-sourcing, where clients work with a number of best-of-breed IT services vendors, rather than a single outsourcer under a far-reaching mega-deal."

Datamonitor tracked new business process outsourcing (BPO) contracts during the first quarter of 2005, worth a combined $6bn. Some 15 of the BPO deals had a value greater than $100m, the largest of which was Atos Origin's $1.6bn contract with the UK Department of Health. However, half of the BPO deals tracked during the quarter had a value of between $10m to $50m, showing that most of today's BPO activity is happening around mid-size contracts, rather than mega-deals.

This trend is particularly evident in the fast-growing HR outsourcing (HRO) sector. Outsourcing advisory firm Everest Group found that the majority of buyers of HRO services are in the mid-to-large segment (with between 10,000 to 25,000 employees), rather than the large-to-mega segment (more than 25,000 employees).

One particular area where explosive growth continues to occur is multi-function HR outsourcing.  Michel Janssen, President of supplier solutions at Everest Group, states that there have been 47 transactions signed since January of last year.  According to Janssen, this number is important because it is represents nearly half of the total number HRO transactions signed to date.  "Senior HRO executives are looking at HRO as an effective way to avoid large capital expenditures for their HR systems, while simultaneously reducing overall costs."

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