by Henry Dewing

Outsourcing Is Poised for Growth Despite Economic Recession

Dec 15, 20084 mins
BudgetingIT LeadershipOutsourcing

Outsourcing and offshoring providers may soon get a boost. Businesses believe that they can take advantage of a more skilled workforce offered by the managed services market, while cutting costs for IT infrastructure, says Forrester Research.

Companies are showing renewed interested in managed services to help manage and mitigate their risks associated with technology decisions—particularly in the current economic environment. Forrester sees some macro-economic factors, including rapid technology evolutions, a coming investment wave in information technology, and market constraints on capital, increasing the attractiveness of managed services over the next 24 to 30 months. Managed services providers will have to hone their execution and sales skills to gain share in this burgeoning market. Why?

  • Faster technology change. Users and buyers are facing a blizzard of new technologies and capabilities. Companies faced with discrete decisions to staff their IT operations group, invest in equipment and facilities, and manage these rapidly evolving capabilities must now consider the shortened useful life of the knowledge and equipment in which they invest. Managed services help provide safeguards against these rapid changes. Cisco Systems touted the ease with which its TelePresence solution, first generally available in Q4 2006, could be installed and maintained on internal corporate networks. A year later, large service providers like AT&T and British Telecom (BT), as well as managed services provider Tata Communications, have met market demand by offering a fully managed Cisco TelePresence solution to help reduce the complexity and cost of the solution.
  • We are sitting at the cusp of a tech investment cycle—despite the near-term economic crisis. Sure, economic uncertainty abounds, but history has proven that the IT industry generally operates in 10-year alternating cycles of innovation and growth followed by cycles of refinement and digestion. Forrester sees late 2009 to 2017 as an innovation and growth cycle, where businesses will invest in new and innovative technologies. This increased investment and innovation will prompt buyers to consider managed options—giving them more nimbleness and breadth to try a variety of solutions.
  • A scary macro-economic client. As the IT industry enters an innovation and growth cycle, the greater worldwide economy is entering a period of significant capital constraints and low growth. Given limited prospects for growth and the high cost of capital, Forrester believes that many businesses will turn to managed services to limit capital investments while increasing the flexibility of IT infrastructure. When using managed services, many Forrester clients—enterprises as well as small and medium-size businesses (SMBs), believe that they can take advantage of a more skilled workforce, while reducing capital expenditures for IT infrastructure.

Business Needs Will Drive the Shift to More Managed Services

Managed services allow business to concentrate on business decisions—not IT management. Increased revenue, reduced cost, and improved efficiency drive interest in managed services, and we believe that this will fuel market growth of managed services of all kinds over the next 24 to 30 months. 67 percent of 911 IT decision makers in Europe and North America that Forrester surveyed in Q1 2008 buy managed telecommunication services for expected cost savings, while 51 percent cite simplified operational management as the primary reason and 47 percent buy managed services for the improved quality and reliability.

  • Firms pick their primary managed services vendor carefully. Best-of-class managed services providers succeed here—of 35 managed services firms covered in Forrester’s Enterprise IT Services Survey, North America and Europe, Q2 2008, five vendors were considered the primary vendor for managed services more than one-third of the time by their customers—Accenture, AT&T, Atos Origin, IBM, and Tata Consultancy. Quality delivery, excellent customer service, geographic/technical breadth of capabilities, and superior sales processes all contribute to a firm’s ability to be considered as the primary vendor.
  • Some buyers can’t manage their own IT—or they don’t want to. It is widely believed that SMBs that do not have the deep IT staff required to complete complex integrations are more prone to consider managed services, but the data does not bear this out—enterprises are significant users of managed services as well. Larger businesses that prefer to have their IT staff perform planning and architecture tasks are looking for vendors to provide managed solutions like unified communications and collaboration while top SMB needs are virus protection and backup solutions.

The Managed Services Vendor Landscape Is Confusing and Convoluted

Over the next two to five years, there will be a significant need to manage hybrid architectures where some resources are on-site and some are in the network, with the buyer managing some services and the services vendor managing others. Managed services vendors will shift their focus to integrating these hybrid deployments—meaning a focus on integration between managed and non-managed services—often from different solutions providers.

Henry Dewing is a principal analyst at Forrester Research. He serves vendor strategy professionals, covering many aspects of unified communications and collaboration. His research agenda includes the role of managed services in the introduction and delivery of innovative capabilities, focusing on the vendor telecom landscape and next-generation business models.