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.
7. The Mega-Death of Mega-Deals. Increased near-term cost pressures will drive a continued decline in mega-deals in 2010, Everest predicts. Customers will continue to eschew the billion-plus deals for more flexible approaches to outsourcing, says Lee Ayling, manager of Equaterra’s U.K.-based IT advisory.
“In 2010, we will see many contracts focused on core processes with shorter, less expensive transition periods and reduced return on investment timescales,” says Brad Everett, executive director of EquaTerra’s human resource practice.
8. The Public Interest. All signs point to increased outsourcing in local and state government. “Budgets are tight, but demands for new technologies are strong,” explains Glenn Davidson, head of EquaTerra’s public sector practice. “The winners in the competition will be offering innovative financing and strong risk insurance.”
However, he predicts decreased outsourcing in D.C. “The federal government, with its ability to print money and this administration’s push for insourcing, is likely to continue its investment in internal solutions,” Davidson says.
9. The (Slow) Return of the Discretionary Spend. Providers of application development, and maintenance and consulting services will develop innovative contract and pricing structures to win customers as the market rebounds next year, according to Everest. Both types of deals took a hit as buyers put discretionary spending on hold.
But such projects will make a gradual recovery in 2010, predicts Everest, noting that “the pace of this change will be dictated entirely by the improvement in the global business environment.”
10. Semi-Sourcing. Cloud computing and software-as-a-service—which EquaTerra’s Stan Lepeak calls “semi-outsourcing alternatives”—will make waves in the IT services industry in the year ahead.
The IT outsourcing market has reached a major tipping point, according to Forrester Research analysts, and a focus on outcomes means that traditional deals will continue to decrease during the next several years as new utility and cloud service offerings proliferate. “This will be a large focus as companies try to figure out how this will work,” agrees Dave Brown, head of EquaTerra’s financial architecture practice. “Those that develop a sustainable commercial offering will hit the headlines early and often.”
Modularity will be the name of the game. Suppliers are poised to offer buyers more and more plug-and-play services coupled with pay-as-you-go pricing. “We have observed a continuing move toward a more scalable and virtual infrastructure for many services…and more aggressive efforts to take advantage of sourcing’s ability to scale up or down with the size of the business,” says Melany Williams, partner and managing director of service provider consultancy TPI Momentum.
But it will be small and midsize companies leading the charge in this space in 2010, says Everest, while large enterprises wait for more of the technical and business challenges to be resolved before adopting these new delivery models.