Megadeals in outsourcing on the up

Outsourcing deals that topped more than $1bn were on the rise in the second quarter of 2004 and are set to surge even more, according to a study.

Five outsourcing megadeals were inked during the quarter, for a total value of $9.2bn, compared with three deals during the same period last year that reached $6.8bn, according to a report released Tuesday by consulting and research firm TPI. The value of pending deals are on par with last year at this time but Peter Allen, TPI managing director, believes that signs point to even more growth.

"The robust award volume of the second quarter, coupled with our pipeline and knowledge of other market activity in this category, gives us a sense of renewed interest in consummating megadeals," Allen said in a statement.

TPI, for example, is directly involved in nine pending deals. Allen is aware of a total of 18 to 20 megadeals in the pipeline. That's up from the same time last year, when there were 12 deals waiting in the wings.

Typically, TPI finds that 65 per cent of deals that are pending ultimately close by the end of the year.

However, while the number of pending deals looks encouraging, the value of those deals may not be enough to push this year's performance above last year.

During the first half of this year, outsourcing megadeals reached a total of $11.2bn, compared with $15bn for the same period last year. And current deals in the pipeline are expected to reach the same level - approximately $20m - as those that were pending at the same time last year.

The number of deals is happening with greater frequency - but at a lesser value than during the dot-com boom. This comes as the industry works its way out of the economic doldrums that have dogged it since 2000. Big IT service deals often carry significant costs in terms of capital expenses and personnel additions.

In related news, outsourcing giant EDS on Monday announced a $1.1bn managed network services deal with Bank of America. Under the eight-and-a-half-year agreement, EDS will combine the communications network of FleetBoston Financial with Bank of America's voice and data network. That project is part of the post-merger work between the two banking titans.

Dawn Kawamoto writes for CNET News.com.