12 IT Outsourcing Predictions for 2012

In 2011, the IT outsourcing industry was marked by smaller deals, leery customers, profit-squeezed IT service providers and a lot of cloud computing talk. Much of that could continue next year, but as our 12 predictions for 2012 indicate, you can expect some new IT outsourcing developments--maybe even a few firsts.

By Stephanie Overby
Thu, December 22, 2011

CIO — The IT outsourcing industry in 2011 was largely marked by smaller deals, hesitant customers, profit-squeezed providers and a whole lot of talk—but not as much action—on the cloud computing front.

Much of that could continue through the New Year—the economic uncertainty behind last year's sourcing trends is unlikely to lift until the latter part of the year. Nonetheless, the next 12 months will bring with them some new IT outsourcing trends and maybe even a few firsts. Following are 12 predictions from forward-looking outsourcing observers.

1. 2012 Will Be a Mixed Bag of M&A Activity

Don't look for a HP-EDS, Dell-Perot, Xerox-ACS type of merger next year. "Outsourcing providers will shy away from mega-mergers," says Phil Fersht, founder of outsourcing analyst firm HfS Research, due to a shortage of attractive second-tier providers capable of delivering more than added scale. (Unless you're in China. Michael Rehkopf, outsourcing consultancy TPI's director for North Asia is predicting a 2012 marriage between two of the top 20 Chinese service providers).

Stateside, the large providers are more likely to snap up software or cloud-based tool markers a la IBM-Emptoris, says Fersht. Or we could see a three-way merger of niche mid-size players to create a new large IT service provider, says Mark Ruckman, outsourcing consultant with Sanda Partners. And while last year's prediction of an offshore provider gobbling up a major U.S.-based multinational didn't come to pass, it's not dead yet. "Look for at least one—and maybe more—major acquisition of a western service provider by an Indian heritage firm," predicts Sid Pai, TPI India's managing director.

2. Outsourcing Buyers Take it Slowly

That recovery we were all looking forward to in 2012? It's delayed. Many outsourcing decisions will likewise be postponed. "Threat of recession will hold back one-in-four buyers from signing contracts until current economic uncertainty lifts," says Fersht of HfS Research. "And a rocky economy isn't helping drive definitive behavior, with three-quarters buyers expecting either little change in focus when it comes to outsourcing, or they simply do not know what they are going to do."

Buyers that remain in the market will focus their outsourcing dollars on a smaller number of deals with simpler pricing models—at least in the first half of the year, says outsourcing consultancy Everest Group, adding that by fall increased business confidence could boost outsourcing activity in general, and offshoring deals in particular.

3. The Cloud Comes Down to Earth

Do you get the feeling that even

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