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Outsourcers Withstand Economic Downturn (for now)

Despite a global economic downturn which has many business and IT executives re-assessing their IT budgets and forecasted spending patterns, far fewer are reducing their spend toward outsourcing IT services, according to Forrester Research. A late 2008 Forrester report shows that while 46 percent of 258 Global 2000 enterprises have already begun to reduce their IT budgets, only 21 percent have cut back on their IT services spend. According to Paul Roehrig, principal analyst at Forrester Research, "The primary value proposition of a good IT services deal for enterprise IT buyers is lowered costs, improved processes and streamlined operations." That suggests that organizations that currently invest in outsourcing will continue that trend during cost-cutting times, and companies that might not have previously considered sending IT services offshore might now evaluate the external delivery model to maximize labor spend or avoid adding head count at home. Roehrig adds, "For the enterprise, outsourcing could help the total spending go down even though outsourcing revenue for the service provider would go up."

Market data from global sourcing advisory firm TPI supports Forrester's survey results. TPI predicts that 2008 will exceed 2007 in terms of the outsourcing contracts awarded. The number of contracts awarded near the end of 2008 is up 5 percent compared to last year, and the total contract value of the deals is up 19 percent. TPI forecasts that the global outsourcing market will reach $88 billion in 2008, up 10 percent from the prior year. Business process outsourcing (BPO) is forecasted to grow 14 percent to $22 billion while IT outsourcing is expected to grow 9 percent and reach $66 billion.

Brian Smith, TPI North America managing director of financial services operations states, Infrastructure-oriented management of servers, desktops and other IT equipment is expected to go unchanged, but software development work could be potentially impacted. There will be a downturn in discretionary projects in the short term, but application maintenance won't be affected."

However, TPI acknowledges the outsourcing market won't go unaffected. TPI reports that the outsourcing industry overall experienced a 22 percent decline in the number of deals from the second to third quarter in 2008, however, much of that decline is attributed to business and IT executive caution in late 2007 and a lessened demand by the financial services industry which has been particularly hard hit.

Outsourcing deals may continue to grow, but that should not indicate that the type and nature of outsourcing contracts will not change, and in many situations will provide benefits to IT buyers. TPI also notes that the trend of larger multi-year, billion-dollar outsourcing deals is on the decline, and more focused and tightly specialized contracts are becoming the new standard. Industry pundits believe this shift is due in part to the well publicized public failures of mega outsourcing contracts as well as IT buyers being more strategic in the functions they choose to perform in-house.

"Comprehensive deals are not as common, and there is a danger to having too many vendor contracts, but generally IT is being more selective on the services it sends out," Forrester's Roehrig says. "Smart IT executives are using IT services not merely to manage technology plumbing but also to profoundly affect business performance."

According to OutsourceWorld CEO, David Etzler, the outsourcing market activity is "higher than ever, but the deal size has changed." The seventh annual October 2008 OutsourceWorld was held in New York and drew about 1,000 participants looking to learn more about their BPO and IT services sourcing alternatives. From talking with CIOs and IT executives at the conference, Etzler indicates he discovered companies are learning that they do not need to put all their outsourced arrangements under one umbrella with a single provider and many are choosing to diversify and well as select specialized outsourcers that address specific business needs.

"Because of the events of Wall Street, companies are in a complete state of shock but recognizing they need to be strategic and look more closely at what their core components are," Etzler says. "The risks they are taking with outsourcers are smaller but more focused on what can really bring gains to the business." Another advantage of more selective outsourcing agreements is that IT executives are negotiating better contracts with service providers. "The smart service providers understand that this is the worst economic crisis since the great depression, and ultimately they will be hurting too," Roehrig adds. "If they can offer enterprises a way to contain costs while improving businesses, they will be able to prove their worth over the long haul."