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The economic crisis has not fundamentally changed buying behaviour for large sourcing projects in Europe, says independent research company Ovum. However, a crisis of confidence and the desire of buying organisations to shift risk onto vendors is holding back progress in the European outsourcing market.
With sales cycles lengthening and budgets tightening, new research from Ovum reveals that vendors are increasingly expected to take on more risk. This is putting pressure on margins and resulting in quality of service emerging as the key battleground for the next 18 months. As a consequence, the number of megadeals has decreased. This combined with the implosion of demand for outsourcing in the UK public sector, has led to falling levels of total contract value (TCV).
In terms of the impact of new delivery models such as cloud services or business-process-as-a-service (BPaaS), the belief of vendors that these will lead to new revenue opportunities is likely to end in disappointment. Ovum predicts that these models will have only a marginal impact on TCV in the short to medium-term due to business models not evolving in line with technological advances.
“Cloud services will become part of a blended delivery backbone, but not necessarily the game-changer that many providers proclaim,” explains Tom Reuner, principal analyst at Ovum. “Instead, vendors need to adapt their business models to allow for continued price and margin pressure beyond risk mitigation as smaller contracts, often in multi-source environments, will increase competition.”
Ovum also encourages enterprises to re-evaluate their approach to renegotiating contracts and seek risk mitigation from vendors as margin pressure forces vendors to compromise on the quality of service delivery.
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