For a long time, IT powerhouses China and India have been dominant players in the IT outsourcing market. However, in recent years, Southeast Asian countries such as Malaysia, Indonesia, and Vietnam have also been making their mark in this field.\nAccording to IDC\u2019s estimates, the broader managed services market for Southeast Asia is valued at US$5.2 billion in 2020. Based on results from IDC\u2019s services tracker for the first half of 2021, this represents a growth of 5.3% in 2020, down from 7.9% in 2019. The managed services markets includes application management, network and endpoint management, hosted application management, hosting infrastructure services, and IT outsourcing.\n[ Keep up on the latest thought leadership, insights, how-to, and analysis on IT through CIO\u2019s newsletters. ]\nThe changes in the IT outsourcer options\nIT outsourcing is a game of scale. IT outsourcing contracts are long-term in nature and the scale of contracts imply traditionally higher entry barriers compared to other IT services markets. This has helped the incumbents (typically global IT services firms) consolidate their hold in the market and grow their business, especially those with multiple locations in Southeast Asian.\nBut IDC notes the dynamics of the IT outsourcing provider ecosystem are changing in four ways:\n\nLocal services providers are expanding. Homegrown IT service providers such as FPT in Vietnam, PT Anabatic in Indonesia, and Heitech in Malaysia are expanding their presence in Southeast Asia and beyond.\nHomegrown service providers from other parts of Asia are expanding into Southeast Asia.Examples include PCCW Solutions from Hong Kong and LG CNS and Samsung SDS from South Korea.\nGlobal service providers are ramping up their presence in the region. For example, Logicalis has acquired Singapore-based iZeno to expand its digital offerings, and Japanese cloud companies are moving into the Southeast Asian market.\nTelco service providers are ramping up on cloud related capabilities as part of a broader managed services push. Examples are TM One in Malaysia and Globe Telecom in the Philippines. Today, \u201cfirms are presented with a decision on how these services are being consumed and managed in the context of the cloud,\u201d said Roger Ling, research director for IDC Asia-Pacific\u2019s IT services tracker.\n\nGoing forward, competition will increase in IT outsourcing, Ling said. \u201cFor the IT decision maker, this presents an opportunity to explore capabilities that can support digital resiliency goals\u201d, he said.\nHow COVID-19 has affected IT outsourcing\nAlthough the market will gradually bounce back in 2021, per IDC\u2019s forecast, the 2020 dip highlights how the pandemic has hit IT-related budgets.\n\u201cThe pandemic forced organisations to take a deep look at their current outsourcing arrangements,\u201d said Krishna Baidya, director of information and communications technologies at consultancy Frost & Sullivan. For example, some organisations assessed whether they had too many or too few outsourcing providers. Others looked at the geographic distribution of their outsourcing, to \u201cright-shore\u201d their providers to reduce risk. That may have led some to move to more local providers, to multiple offshore providers, to having their providers in multiple countries, or to outsource to the cloud (called \u201ccloud-shoring\u201d)\u2014or some other mix.\n\u201cWhile the shift to incorporate cloud-related services as part of the overarching IT outsourcing strategy has been at play for a while, IDC sees the pandemic as a catalyst that has accelerated this trend, Ling said.\nIn their planning for after the pandemic, organisations are reconsidering their IT spending as part of broader cost-optimisation theme. \u201cThis is a perfect storm for organisations to take advantage of outsourcing partners to achieve immediate cost savings,\u201d Frost & Sullivan\u2019s Baidya said. But he argued that, for organisations seeking IT services, quality is likely to be more critical than quantity and so they are prioritising process over price.\nThe COVID-19 pandemic has forced businesses to digitalise their operations faster. However, very few have the luxury of such skills in-house. Thus, dependency on outsourcing providers is likely to increase. \u201cWe noticed increasing digital transformation contracts as part of the IT outsourcing deal where organisations are also seeking to leapfrog to a modernised environment through a partner\u2019s capability while offloading their legacy,\u201d Baidya said. \u201cHowever, to grab such opportunities, providers had to be more flexible and consultative than the traditional outsourcing lift-and-shift models.\u201d\n\u201cWith firms prioritising efforts around digital transformation, IDC expects more operational IT related tasks to be outsourced,\u201d Ling said. \u201cThis is seen as essential in freeing up resources to focus on strategic initiatives. That said, what has been more prevalent in recent times is how these services are being delivered and consumed.\u201d\nThe pandemic created physical restrictions to operations, which prompted the increased use of automation and remote-management tools to ensure business continuity. Therefore, increased flexibility is going to be a major point of negotiation for firms with IT outsourcing contracts due for renewal, Ling said. \u201cThis could drive conversations around the ability to adapt the scope of services, gain access to more variable payment options, adjustment for length, and including options,\u201d he says. \u201cIn the longer term, IDC expects deeper entrenchment of advanced automation as part of the outsourcing engagement. This will be key as the incorporation of cognitive capabilities will drive efficiencies across IT and business operations.\u201d\nFinally, the pandemic might not be over soon, and some countries in the region could witness additional waves of outbreaks. Thus, IT service providers must strategically plan beyond just the day-to-day running of clients\u2019 IT operations. \u201cThe intersection of resiliency, agility, and mobility will be key in providing relevant offerings during this period,\u201d Ling said.