The Outlook for Outsourcing

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.

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 outsourcing advisory NeoIT.

By the end of 2008, however, CIOs became too distracted by the economic destruction 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.

"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 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 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."

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.

And remember all that talk about how an IT services provider could be your partner in innovation? Forget about it.

"The focus will shift away from open-ended efforts," says Stan Lepeak, research director of outsourcing consultancy EquaTerra. "Buyers will not have much appetite for transformation in 2009."

Although outsourced innovation will be set aside in 2009, the greening of IT outsourcing deals will not, if only because sustainability can mean cost savings. "Purely environmental desires will take a back seat to explicit cost savings desires," says Lepeak. "But green that hits the bottom line will flourish."

 

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