Can Outsourcers Survive the Economic Storm?
IT service spending might not feel drastic cuts as high-tech leaders look to shave dollars off their budgets, because outsourcers and service providers could help them contain costs and streamline operations, industry analysts say.
A majority of IT executives report they are re-assessing how to invest what's left of their 2008 IT budgets. Many have decided to cut overall IT spending, but relatively fewer are reducing the amount they put toward outsourcing IT services, according to Forrester Research. A recent Forrester survey shows that while 46% of 258 Global 2000 enterprises have already cut back their IT budgets, only 21% have cut back on their IT services spend.
"The primary value proposition of a good IT services deal for enterprise IT buyers is lowered costs, improved processes and streamlined operations," says Paul Roehrig, principal analyst at Forrester Research.
That means IT executives that currently invest in outsourcing will continue that trend during cost-cutting times, and companies that might not have previously considered sending IT services to an external provider might turn to the delivery model to avoid adding head count or investing in new technology.
"For the enterprise, outsourcing could help the total spending go down even though outsourcing revenue for the service provider would go up," Roehrig says.
For instance, despite reported softness in the third quarter, global sourcing advisory firm TPI anticipates 2008 to outperform 2007 in terms of the outsourcing contracts awarded. The number of contracts awarded until this point is up 5% compared to last year, and the total contract value of the deals is up 19%. TPI estimates that the global outsourcing market will reach US$88 billion in 2008, up 10% from the previous year. Specifically business process outsourcing is expected to increase a total of 14% to $22 billion, and information technology outsourcing is forecast to be up about 9%, bringing revenue to $66 billion.
"Infrastructure-oriented management of servers, desktops and other IT components is expected to go unchanged, but application development work could be potentially impacted. There will be a downturn in discretionary projects in the short term, but application maintenance won't be affected," says Brian Smith, partner and managing director of financial services operations for TPI North America.
Still the outsourcing industry won't go completely unscathed, according to TPI. TPI reports that the outsourcing industry overall experienced a 22% drop in the number of deals from the second to third quarter this year, but the firm attributes that to IT executive caution in late 2007 and a lessened demand in the financial services industry. Still, TPI says it doesn't anticipate certain types of sourcing deals to be cut in reaction to more recent economic woes.
"Because the value for much of outsourcing is efficiency and process management, we don't see any reason the economy would significantly negatively affect those deals," Smith says. "Our view is the same pattern of activity we've seen in 2008 will repeat in 2009."
Outsourcing deals may continue to multiply, but that doesn't mean that the nature of outsourcing deals won't change -- and in some cases, to the benefit of enterprise IT buyers. TPI notes that the trend toward large multiyear, billion-dollar outsourcing deals is on the downturn, and more targeted, specialized contracts are becoming the norm. Industry watchers attribute this shift to public failures of comprehensive outsourcing contracts and enterprise IT being more strategic in the functions it performs in-house.
"Comprehensive deals aren't as common, and there is a danger to having too many vendor contracts, but generally IT is being more selective on the services it sends out," Forrester's Roehrig says. "Smart execs are using IT services not merely to manage technology plumbing but also to profoundly affect business performance."
According to David Etzler, CEO of OutsourceWorld, activity in the outsourcing market is "higher than ever, but the deal size has changed." The seventh annual OutsourceWorld was held this week in New York and drew about 1,000 attendees looking to learn more about their sourcing options. From talking with CIOs there, Etzler says he discovered companies are learning they don't need to put all their functions under one umbrella with a single provider and many are opting to pick and choose outsourcers that best address specific needs.
"Because of the events of Wall Street, companies are in a complete state of shock but realizing they need to be strategic and look more closely at what their core components are," Etzler says. "The risks they are taking with outsourcers are smaller but more focused on what can really bring gains to the business."
Another benefit of more selective outsourcing deals is that IT buyers can negotiate better contracts with service providers, especially in the down economy.
"The smart service providers understand that this is the worst economic crisis since the Depression, and ultimately they will be hurting too," Roehrig adds. "If they can offer enterprises a way to contain costs while improving businesses, they will be able to prove their worth in the long haul."