Economic Recession Fuels IT Outsourcing, Offshoring
Companies flocked to IT outsourcing vendors as the recession unfolded last year and industry watchers expect more of the same as companies seek to slash fixed costs and deliver services with smaller staffs.
Fri, February 13, 2009
Network World — Companies flocked to IT outsourcing vendors as the recession unfolded last year and industry watchers expect more of the same as companies seek to slash fixed costs and deliver services with smaller staffs.
"The pipeline for the leading outsourcers is strengthening as they get a lot of distress calls from new prospects. We haven't tracked a slowdown in the market yet," says Ben Pring, research vice president at Gartner.
The market research firm reports that the average contract size among the top 20 outsourcing deals inked in 2008 reached US$998 million and the average length exceeded six years. Companies such as AT&T, EDS and Tata Consulting Service contracted multi-year, megadeals in 2008, while IBM in late December signed multi-year outsourcing contracts with Whirlpool and Sara Lee, the values of which were not disclosed. Overall IBM reported it had signed services contracts totaling $17.2 billion, including 24 greater than $100 million, in the fourth quarter.
"IBM was able to be quite bullish and quite confident on its positive guidance because of its outsourcing backlog," Pring says.
Others, such as HP-EDS also entered 2009 with momentum. IBM Global Services' top challenger won five of the largest deals in 2008, Gartner says.
Despite IBM's contract wins, the company was actually absent from the list of the biggest deals, evidence of a different dynamic among IT buyers. Global sourcing advisory firm TPI noted that megadeals, those valued at more than $1 billion, peppered the first half of 2008 but tapered off into the second half as economic conditions worsened. Yet the number of smaller, shorter-term deals increased.
"TPI continues to see overall total contract value size decrease, which is a function of shorter contract duration (under five years) and more discrete sourcing," says Mike Slavin, partner and managing director, CIO Services North America at TPI. "A significant percentage of our engagements are now below the $25 million threshold."
Making the best deal
Smaller deals over fewer years show that buyers are trying to address specific pain points.
For instance, Gartner noted customers in 2008 displayed growing focus on green IT as it related to infrastructure outsourcing and "the carbon footprint of data centers." Yet while green IT is growing in popularity, the focus remains on cost, power optimization and service resilience, more so than environmental motivations. Other infrastructure services such as remote monitoring are also gaining buyer interest as companies look to reduce costs via lower labor rates and reduce manual efforts.
"The challenging economic environment will continue to drive buyers to make costs containment a priority in infrastructure outsourcing, while objectives such as business enhancement will temporarily lose their attractiveness," Gartner states.
