10 Outsourcing Trends to Watch in 2010

CIO — It was a long year of intense ups and downs in the IT outsourcing industry. Consolidation among vendors and interest in remote infrastructure management increased, while overall outsourcing demand and IT services pricing decreased.

The market for IT outsourcing is expected to rebound a bit in 2010, say industry watchers. For instance, more than 75 percent of the service providers polled by EquaTerra in the third quarter of this year reported continued growth in their deal pipeline, which was up 10 percent from the previous quarter and 34 percent from the same period last year.

But don't expect too robust a revival. Outsourcing consultancy Everest predicts that although suppliers will see a resurgence in demand for IT and business process outsourcing services in 2009, growth rates are unlikely to return to pre-2008 levels.

Both suppliers and outsourcing customers could be in for a bumpy ride in 2010. Here are 10 trends to look out for as the IT services industry finds its feet in the "new normal" of the post-recession.

1. Transformers 2. Sure, outsourcing customers will still want vendors to transform IT in 2010. But revolutionizing IT service delivery is expensive and difficult.

"Optimization is the new transformation," says Mark Toon, CEO of outsourcing consultancy EquaTerra. "Ultimately, organizations will still want to 'transform' how they deliver back office services, but they typically will want to move in pragmatic, incremental steps and focus on achieving best in class, standardized and optimized delivery models."

2. If at First You Don't Succeed, Renegotiate. There has been an increase in the number of contracts being renegotiated and rebid during the past 12 months, according to outsourcing consultancy Compass America, and that will continue in 2010.

"While many organizations remain keen to avoid the costs of new capital and migrating to new suppliers," says Tom Schramm, EquaTerra's managing director of finance and accounting, "investment is being made in ensuring existing suppliers and internal processes are delivering optimum value."

3. Multi-Sourcing Malaise. Multi-sourcing seems ideal in theory—work with best-in-class IT service providers and keep costs in check, thanks to the competition. In reality, it's been difficult at best and disastrous at worst for many customers.

"Organizations are reassessing their approach to selective sourcing and multi-sourcing, and realizing that they need to have a certain level of maturity in terms of processes, governance and vendor management in order to make the multi-vendor model work," says Bob Mathers, senior consultant with Compass America. "Organizations that have pursued multi-sourcing without investing in management capabilities are finding themselves longing for the problems they used to have with their one and only vendor." Watch for reevaluation and restructuring of these relationships next year.

4. Captive No More? While certain companies will continue to set up fully-owned IT delivery centers abroad, look for more captive center divestitures in the new year and a "marginally lower" number of new captives being set up, predicts Everest.

5. The Urge to Merge. The number of top-tier service providers shrunk this year, creating both challenges and opportunities for other vendors in 2010.

"Consolidation at firms, including HP, EDS, Dell, Perot, ACS and Xerox, may represent an opportunity for their competitors," says Charles Arnold, managing director of EquaTerra's IT advisory for the Americas. "From acquiring former staff of top-tier providers to snapping up now empty chairs at the bidding table, competitive providers may be able to leverage this chance to grow capability and market share in 2010."

The M&A party is likely to continue after we've rung in the new year. "This consolidation will most likely involve tier two and tier three providers, as they struggle to compete with the breadth and depth that their tier one competitors can offer," says David Rutchik, partner with outsourcing consultancy Pace Harmon. "We would not be surprised to see a non-offshore provider acquiring an offshore-based provider."

Everest predicts that most consolidation in 2010 will focus on acquisitions of "adjacent and complementary capabilities across functions, verticals and geographies," as opposed to mergers solely to increase scale.

6. Offshoring to...America? The greenback has had a grueling year. That could play out in some interesting ways. "With the continued decline in value of the dollar and sluggish employment, I would expect to see more U.S.-based sourcing solutions evaluated by private and public sector clients across the globe," says Peter Iannone, EquaTerra's executive director for the Americas.

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