Offshore Outsourcing Contracts Change With The TimesOffshore Outsourcing Contracts Change With The Times

Many seven- to 10-year contracts signed as the offshore industry started to boom are winding down. Often in their place are shorter pacts, with fewer megadeals as buyers split their work among multiple service providers.

"The days of 10-year contracts are few and far between," says Paul Spence, CEO of global outsourcing at Capgemini, where the average deal length today is 6.4 years. Capgemini still sometimes lands a whopper, like its $9 billion, 10-year deal with the United Kingdom's Revenue & Customs department, in which much of the work is done offshore. But that deal happened only because both sides can renegotiate some aspects of the contract over the years, to react to technology changes, for example.

As long-term deals end, Dan McMahon, a senior associate with outsourcing advisory firm Pace Harmon, sees companies switching suppliers, rebalancing what's onshore and offshore, and in some instances bringing select work back in-house. He also sees higher-level executives taking charge of offshore contracts.

As offshore salaries rise, the easy pickings contracts that save 70% on simple coding are gone, says Atul Vashistha, chairman of outsourcing consulting firm NeoIT. But companies can still save 30% on many types of IT projects, he says, and "we have a long time to go" before that gets squeezed.

There were 228 outsourcing contracts worldwide valued at more than $50 million in the first three quarters of this year, a 16% drop from like-sized deals last year, consulting firm Technology Partners International finds. That hurts global giants--Accenture, Capgemini, IBM--and can help the Indian firms, which then get a slice of big deals. The value of contracts split between Indian and U.S. customers has risen 37% this year, says TPI.

Indian operations are suffering under the rising rupee, making contract pricing a "difficult discussion," McMahon says. It's why Indian firms are often the ones pushing to tie projects to a business outcome measurement such as revenue increases or cost cuts, so the buyer focuses less on the price of hourly labor.

Capgemini often has negotiated contracts that include around a 5% annual price hike for salaries. That doesn't help in India or Poland, where annual salaries are rising about 15% and 9%, respectively, says Spence. So Capgemini has started negotiating contracts that shift work over time along a pyramid, where the most-educated and highest-paid people fill the top 15%. They work on the contract early on to build and implement, then shift work to lower-salary workers to maintain it. It's just one of the ways contracts are keeping up with the changing offshore market.

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