Gartner Predicts Limited IT Outsourcing Growth and Increased Volatility

The worldwide IT outsourcing market is poised to grow more slowly than previously expected, reaching $288 billion in 2013, a 2.8 percent increase from 2012, according to Gartner. Looking out further, Gartner predicts a 5.4 percent compound annual growth rate (CAGR) in the global outsourcing market through 2017.

The IT services market in North America should see a bit more activity, growing by 8 percent through the end of the year and by a 6 percent CAGR through 2017, spurred largely by infrastructure-as-a-service, hosting, and co-location deals, Gartner says.

Economic Factors Contributing to Sluggish IT Outsourcing Growth

A number of factors are contributing to more sluggish growth overall, according to the Gartner report. Cloud computing (which Gartner does not include in its IT outsourcing figures) has taken business away from traditional outsourcing and caused downward pricing pressure on IT services.

First-time outsourcers are delaying decisions or reducing the scope of their deals amid economic uncertainty, which Gartner says will continue to dampen IT spending growth by as much as three percent annually through next year.

Meanwhile, IT service providers continue to make price concessions and sign or renew only the most profitable deals. And some of the biggest IT service providers–HP, CSC, and CapGemini, for example–are in the midst of strategic changes or turnaround plans which is further stunting growth. Nearly 39 percent (77) of the top 200 providers did not grow in U.S. dollars during 2012, and seven of the top 25 market share leaders declined, according to Gartner.

Interestingly, a focus on cost-containment and the increased interest in asset-light strategies today ought to push clients toward more outsourcing. But, says Bryan Britz, research vice president in Gartner’s IT outsourcing and support services group, “client needs to balance economic uncertainty continue to compress ITO spending.”

Many organizations are wary of multi-year investments amid continued economic uncertainty, fueling some areas of IT outsourcing spending–discrete services like hosting or co-location–over traditional, higher-revenue data center outsourcing deals.

‘As-a-Service’ Pricing Models Are the Future

Going forward, increased client adoption of volume-based pricing models will cause the IT outsourcing market to exhibit more cyclical patterns, says Gartner. Pricing models based on consumption–pay per-user, per-image, per-device–are eclipsing traditional fixed price deals.

And as companies seek to move more of their spending from operations or running the business (currently around two-thirds of the average IT budget) to new projects and innovation, they are embracing the as-a-service model.

A first-time outsourcing customer may be more likely to consume desktop-as-a-service, for example, than invest in the related desktop virtualization software and data center hardware required to deliver virtual desktops to end users, says Britz.

“Putting it all together, the drivers to outsource today align better with service delivery models that create access to capabilities that tend to be more consumption or unit based in their pricing models,” says Britz. As a result, movements in the outsourcing market that traditionally “moved at a glacial pace” will exhibit more volatility.

Stephanie Overby is regular contributor to CIO.com’s IT Outsourcing section. Follow everything from CIO.com on Twitter @CIOonline, Facebook, Google + and LinkedIn.