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Thursday, June 03, 2010

IT Outsourcing Trends: Slow Growth, Cloud Computing

Despite predictions to the contrary, IT outsourcing has contracted rather than expanded in the years since we entered the Great Recession, according to industry watchers.  “Most companies in most of the categories we track are only partially outsourcing a function,” said John Longwell, vice president of research at research firm Computer Economics….As we’re coming out of the recession, that trend is going to reverse itself.”  IT consultancy EquaTerra said that more than 75 percent of the service providers it polled in the third quarter of 2009 reported continued growth in their deal pipeline, which was up 10 percent from the previous quarter and 34 percent from the same period year-over-year.  The most recent Global TPI Index indicated that the IT outsourcing market’s total contract value in the fourth quarter of 2009 reached $19 billion, the highest quarterly total in six years.

To put it plainly, 2009 was the year of IT outsourcing deal renegotiation.

“One of the dominant features of the outsourcing market over the last 12 to 15 months has been the emphasis on cost above all else,” noted research firm Morrison & Foerster in a report on IT outsourcing trends in January.

The difference is that during the boom years of 2002-2008, cost was often down-played by customers and, instead, emphasis was placed on other business benefits such as transformation, concentrating on core competencies, and speed to market.

The analysts explained that this is why so many outsourcing contracts were renegotiated in 2009, with suppliers asked to share some of the pain of their customers.

Morrison & Foerster noted that economists are now talking about a “LUV” recovery from the recession, with the letters representing the “shape” of the recovery: a very slow L-shaped recovery for Western Europe; a slower U-shaped recovery for North America; and a rapid V-shaped recovery for Brazil, Russia, India, China and other emerging economies… In turn, that means service providers will have to carefully consider how to price new transactions in light of the “twin threats of cloud computing and continuing labor cost arbitrage.”

And, if parts of the world economy move at different speeds over the next 12 months, Morrison & Foerster said service providers will need to consider more varied pricing strategies.  Flexibility will be the watchword in outsourcing deals in 2010, according to Morrison & Foerster.

“In 2010, we see a continuation of the trend for shorter deals, shorter procurement processes, and an emphasis on making things work rather than engaging in complex strategies,” the analysts said. 

This is likely to lead many firms to take their IT services procurement in-house—-so-called DIY sourcing.

“While the DIY approach will often result in short-term transactional cost savings, inexperienced purchasers of outsourcing services usually suffer longer-term losses because they fail to identify many of the key components for long-term success.” 

For example, with the increased focus on costs, buyers will try and save on governance costs and overlook necessary governance functions.  Particularly when customers engage in multisourcing transactions, heightened attention to governance processes is critical.

As the recovery gets underway, banks and insurance companies—which were among the hardest hit verticals of the recession and which put more deals on hold in 2009 than other sectors—are likely to come back to the fold in 2010, particularly toward the second half, according to Morrison & Foerster.

Cloud computing is likely to take center stage in IT outsourcing in 2010, according to experts.  At the very least, the dramatically lowered cost of cloud providers will become a lever for customers to use in negotiations with their traditional sourcing providers.

Posted on 06/03