by Robert Jacques

Outsourcing market report

Jan 11, 2011
GovernmentIT LeadershipIT Strategy

The business case for outsourcing services and processes to specialist third-party providers is well understood and the market is now relatively mature, according to industry experts.

There are now a wide spectrum of companies offering services including Capgemini, Capita, Accenture, EDS, IBM and Logica noted Clive Longbottom, service director at Quocirca

He says: “It is now pretty much a given that companies are not asking whether they should be looking to outsourcing, but rather what they should be outsourcing and when. More and more organisations have come to realise that technology is not a core competency and so look at tasks can and should be outsourced.”

Tony Morgan, IBM’s chief innovation officer for outsourcing told CIO that IBM in the UK is experiencing strong demand from enterprise clients across the full range of outsourcing services including IT infrastructure outsourcing (ITO), application and business processing outsourcing (BPO) services.

“This includes demand from clients with an established track record in using outsourcing as part of their business model and clients who perhaps in the past have only made very targeted use of outsourced services,” he said.

Andrew de Cleyn, MD Outsourcing Logica UK, added that established business-led outsourcing initiatives- including BPO, ITO SaaS and bureau services – are being augmented by new outsourcing models, which centre on medium-size companies looking to move more than just back office processes to third-party suppliers.

Unsurprisingly cost reduction remains the most commonly cited reason for firms to outsource services.

According to IBM’s Morgan: “Cost is obviously extremely important — both in terms of absolute cost but also in terms of moving from a largely fixed cost model to a variable cost one, giving the capability to ramp up and down over time in line with business demand, including the ability to rapidly grow following merger and acquisition activity.”

In terms of vertical sectors where outsourcing is being most enthusiastically embraced, Logica’s de Cleyn notes that in the UK public sector adoption is a growth area as government strategies such as themove towards shared services are creating more opportunities.

“There is also a softening of attitude towards off-shoring in the Public Sector which presents new opportunities. Other sectors such as the financial, space and defence sectors are also seeing strong growth. Any area which is seeing strong M&A activity is also a major growth sector,” he said.

Despite this maturing of the outsourcing model, experts note that recent economic turbulence has had a significant impact on the sector. The 3Q10 Global TPI Index, which measures commercial outsourcing contracts valued at $25 million or more, recorded total contract value (TCV) of about $14 billion, down more than 20 per cent from both the previous quarter and the same period last year.

It reports a sharp increase in global outsourcing contract restructurings as organisations try to re-evaluate the value of placing core business process functions with third party providers.

According to the study, restructuring activity, which includes renegotiations, renewals and extensions of existing outsourcing contracts, totalled $6.8bn during the third quarter, or 48 per cent of the global market. Year to date, restructurings have accounted for 34 per cent of overall TCV, compared with typically about 20 per cent over the past three years.

However, despite the recent downturn Gartner predicts that a combination of technology and social trends including cloud computing, globalisation, hyperdigitisation (where products and services are becoming  increasingly digital) and consumerisation will continue to drive global outsourcing forward.

“In the future of IT services and outsourcing, the role of IT management and sourcing leaders as well as the role of service executives will be more important than ever before to help their respective organisations navigate the current market forces and apply these new norms of outsourcing in a successful way,” said Allie Young, vice president and distinguished analyst at Gartner. “Embrace the opportunities that these forces introduce to reinvent IT support of business goals.”