Offshoring and Outsourcing in 2009: What Does the Future Hold for the IT Services Industry
Companies looking to cut costs as the economic recession progresses means more outsourcing, but that rush to save money often means making bad deals you'll regret long term.
CIO — All things considered, 2008 was a relatively stable year for the IT services industry. Deals got smaller and shorter, but they grew in number. The second tier providers and Indian vendors did well, along with Accenture and IBM Global Services. The outlier was EDS, where weakness led to its acquisition by Hewlett Packard.
IT outsourcing providers were largely unscathed by the economic downturn throughout much of the year. "It took almost two quarters for the effects of the slowdown to manifest in providers' financial statements," says Eugene Kublanov, CEO of San Ramon, Calif.-based outsourcing advisory NeoIT. By the end of this year, however, CIOs became too distracted by the economic destruction surround them to do any outsourcing deals. "As the markets crumbled and CIOs were confronted with the prospects of their personal employment, naturally, decision-making around strategic cost cutting and efficiency took a back seat," says Kublanov.
That's all poised to change in 2009. The only problem is, that may be bad news for both IT services providers and their IT leader customers.
Back to the Future: More—Not Better—Outsourcing
"Whenever there's a downturn people outsource more, not less," says Gartner analyst Linda Cohen. "Organizations want to take costs out wherever they can. CFOs are pounding on their CIOs to just outsource it, just offshore it."
"The difficult economic conditions will push companies further than before to consider what stays in house and what gets done by others," agrees NeoIT's Kublanov. "Additionally, demands by the business for further cost reduction will need to be addressed in an environment where many companies have already leveraged labor arbitrage to source the low hanging fruit."
CIOs may sign hasty deals for a short-term returns. In a case of what Cohen calls "convenient amnesia," IT leaders may forget all the lessons they learned rushing into bad outsourcing arrangements and chasing elusive benefits. "Everyone has a gun to their head right now," she says. "But the financial voodoo of outsourcing deals doesn't work. You have to accept the reality that if you hand your mess over to a vendor, you're going to eventually have to pay for that burden they take off your plate. You can pay it now or pay it later, but you're going to have to pay."
Bad deals can lead to degradation in service performance and price increases down the line. Smart buyers will ask for shorter term lengths, but in times of economic pressure rational thinking is hard to come by. "People do bad deals for short-sighted reasons," Cohen says. "We've seen it before and we'll see it again."
