Consumer goods giant Procter & Gamble's (P&G) decision to opt for multiple partners for its £5bn outsourcing project may signal the end of outsourcing 'mega-deals', according to analysts.
Market watcher Ovum Holway has warned the number of large outsourcing contracts given to a single vendor will decline in future, as such deals are risky and difficult to finance.
P&G had planned to outsource all of its back office functions with EDS. But a profit warning issued by EDS in September put the deal on hold, and the company has now decided to seek multiple suppliers for its service.
A strategy that employs multiple outsourcers helps reduce risk, said Anthony Miller, principal analyst at Ovum Holway.
"Procter & Gamble were looking at outsourcing their entire back office. Finding a single vendor that has the skills for the entire deal is difficult. It also means you are putting a huge number of eggs into one basket," he said.
Under the original plans, 7,500 P&G staff were to have transferred to EDS as part of the deal.
P&G had to "do some hard evaluations" following the profit warning from EDS, before opting to break the outsourcing project into smaller chunks, said a company spokeswoman.
The deal would have been a massive boost for EDS, worth around £500m a year. But it appears that it was unable to make P&G a compelling offer to close it. Financing these so-called 'mega-deals' may require a rethink from the outsourcers.
Earlier this year, consulting group Accenture brought in Barclays Bank to help it raise capital necessary to win an outsourcing deal for Sainsbury's. Barclays' help was needed to pay the upfront fee needed to acquire the IT assets of the supermarket chain.
Speaking at the time of the deal Stephen Francis, director of corporate financing at Barclays, said financial houses had the advantage of being able to raise money at preferential rates, whereas "IBM and EDS have to pay more for their capital".
Other customers have also shied away from mega-deals. In October, high street chemist Boots announced that it was to use separate vendors in outsourcing its IT operation.
However, EDS has vowed to continue chasing the very largest contracts, said company spokesman Ken Smalling.
"It has been our strategy to go after mega-deals. It is a solid strategy, one that we have done well out of, and remain committed to," Smalling said.
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