IT & BPO contracts are getting shorter as enterprises strive for faster results

HFS tracks publicly announced contracts to understand the current market trends across the IT and BPO industries. This Data Viewpoint examines a trend we’ve seen in the data over the past three years—the tenure of deals is getting shorter.

• Volume of deals signed for less than 3 years remains pretty much the same in the last three years. Most of the deals signed under this tenure include application modernization, analytics, blockchain and mobility related services. Many renewals or the extension deals was signed under this tenure.
• Three-year deals saw the greatest growth during the assessment period. Percentage number of contracts signed in 2019 for 3 years tenure nearly doubled in 2021. During the pandemic, the need to adopt emerging technologies was evident among the enterprises. Due to the surge in the requirement of the digital services, many enterprises engaged service providers for IT services related to the SaaS, artificial intelligence, automation, security, mobility, and IoT. This embrace of shorter deals length underscores enterprises’ need for speed to value.
• Deal length of 4 to 5 years remains the most likely opted one among the enterprises throughout the last three years. Most of the deals signed under this duration includes the multi-IT infrastructure services including application design, development, management and modernization services along with infrastructure services. In the pandemic years 2020 and 2021, many enterprises went through the IT or digital workplace transformation to keep their businesses running and optimized. We saw these longer duration deals slide off in 2020, but they made a slight resurgence in 2021 underscoring the point that transformation takes time.
• Though the contracts signed for tenure more than 6 years in the last 3 years, has increased slightly. Most of the deals signed under this includes the service related to BPO (mainly HRO, FAO and Industry BPO), networking and Infrastructure deals. This are largely public sector contract vehicles.

Overall, deal durations are decreasing due to market uncertainty. The changes in the market are dynamic and difficult to predict the trends in the next 5 years. Clients want quick value and the ability to pivot if required and shorter contract terms provide them with that agility. However, we expect transformation focused deals to continue to truncate as enterprises seek results and ROI at pace. Whereas ongoing maintenance engagements and care and feeding of certain irreplaceable legacy are likely to continue on long-term auto-pilot with longer contract terms.

The Bottom Line: Enterprises increasingly want and need speed to value. The trend of contracts being signed for shorter durations directly reflects changing expectations about time to outcomes. Enterprises should strive for value at pace. Service providers need to ensure they have the right mix of talent, innovation, and commercial creativity to meet changing enterprises needs.