Where IT Outsourcing is Headed

Two years ago, when I was writing stories about outsourcing, my focus was on application development -- should an enterprise hire programmers in India, Russia, or South America to get applications built more quickly?

My, how times have changed. Now when you mention outsourcing, you’re more likely talking about outsourcing data center functionality, including the new push for cloud and enterprise agility.

That’s part of the focus of a new study of 550 IT executives around the world about current and planned IT environments. Savvis (a global managed hosting and colocation provider with expertise in outsourced IT and cloud services) issued its third annual report, Fast-Forward to 2012: 550 Global IT Execs Share Their IT Outsourcing Strategies, and as you might expect, cloud is grabbing an “ever-larger mindshare of IT leaders as a way to accomplish” business agility and ensuring IT can keep up with technology.

Most interesting is that the survey found executives are shifting their focus from cost cutting to business strategy. As the report points out,

Specifically, over the next 12 months, organizations told us that they need their IT departments to facilitate three critical goals: first, increase collaboration both internally and throughout the extended enterprise; second, enable operational efficiencies at all organizational levels and all departments; and finally, achieve a competitive advantage in the marketplace.

Other good news: IT budgets are becoming less limiting. In last year’s survey, the company found that budgets were less restrictive than in 2010. This year, the trend continues, with only one in four organizations saying they faced IT budget constraints, though that figure varies by country.

That’s not to say that all IT purchases were wise ones. “Looking back over the past year’s IT decisions and activities raised some regrets. CIOs and VPs of IT reported that they made mistakes when spending their IT dollars. Specifically, most admitted that purchasing their own IT assets turned out to be a mistake. In retrospect, outsourcing IT infrastructure would have been the wiser choice.”

OK, sure, Savvis is in the outsourcing business, so that IT sentiment is music to their ears. However, other findings are in line with studies from other organizations -- or just reflect common sense. One of the highly touted benefits of outsourcing is that it makes more money available for other strategic initiatives. According to the survey, leading the pack of those initiatives are “increasing collaborations across the organization” and “gaining efficiencies throughout the company.”

Savvis also found that, on average, most organizations are outsourcing “slightly more than a quarter of their IT infrastructure,” with savings estimated at about 26 percent of their IT budgets -- that’s after factoring in the cost of the outsourced service. With numbers like these, it’s no wonder that organizations surveyed say that within five years at least 40 percent of their infrastructure will be outsourced. The smaller their global revenues, the more likely an organization will be outsourcing IT tasks at a higher rate.

Why isn’t outsourcing growing faster? For most enterprises, it’s because contractual obligations are getting in their way. (In the UK, the company culture is the biggest problem.)

Organizations are most likely to be outsourcing test and development, Web site operations, and backup and disaster recovery tasks. Asked to name, which applications are most popular in the cloud, respondents overwhelmingly chose e-mail and intranet tasks. Of the 38 percent of respondents investigating outsourcing, infrastructure for big data analytics is at the top of their evaluation list.

I asked Brian Stillwell, senior director, global solutions management ITO at Savvis what he thought about the growth of outsourcing in five years. What percent of an IT’s infrastructure did he expect to see, and what aspect of that infrastructure would move to the outsourcer first?

“Globally, we expect outsourcing to increase 15 percent over the next five years as organizations move 40 percent of their infrastructure to service providers. We think U.S. trends will parallel this global movement, with 50 percent of American enterprise infrastructure outsourced in the next five years.

“Test and development, Web applications, and back-up/recovery are primary drivers of today’s outsourcing growth. Looking ahead, we expect continued strong growth in back-up recovery services, as well as big data analytics and regional applications, pushing the trend upward.”

Of course, outsourcing isn’t just about money -- there’s also the need to stay competitive. Half of the organizations surveyed said they’re outsourcing in order to improve agility -- that’s according to 59 percent of those in the U.S. down to 50 percent for those in the UK. In Germany, outsourcing is being driven by the lack of “qualified IT personnel.”

As more organizations outsource more of their infrastructure, will the drivers today be the same drivers and five years?

“The need for competitive, agile performance will always be there,” Stillwell said. “However, as the focus shifts from declining legacy maintenance, we expect to see more businesses leveraging cloud and managed service to drive efficiency, collaboration, and strategies that foster growth and innovation.”

Executives and “business decision makers” in United States, the United Kingdom, Germany, Japan, Hong Kong, and Singapore participated in the study. The full report is available here; a short registration is required for access.

-- James E. Powell
Editorial Director, ESJ

Posted on 09/25/2012