In-Depth

Outsourcing Uptick Ahead?

Some industry analysts expect the economic downturn to result in a net gain for outsourcers.

• By Stephen Swoyer
• 01/27/2009

During the last economic downturn -- the post dot.com implosion -- an increasing number of organizations shifted IT work to outsourcing providers, many of them overseas.

Amid the current economic uncertainty, market watchers can’t agree on the direction outsourcing will take. Some businesses will probably opt to kill existing outsourcing arrangements to cut (or at least freeze) costs -- but some in the industry expect the economic downturn to result in a net gain for outsourcers. Not even the analyst firms can agree.

According to Forrester Inc., which last week issued its revised IT spending forecast for 2009, IT spending as a whole will fall (by 3 percent) -- triggering an attendant drop in outsourcing activity.

"Global IT services and outsourcing will decline," reads a recent Forrester release. The upshot, according to the firm, is that government and private-sector customers will spend 3 percent less on outsourcing this year than they did in 2008. "IT outsourcing services will do a bit better than IT consulting and systems integration services, with the latter vulnerable to the slowdown in purchases of software to be implemented and integrated," Forrester concludes.

Market watcher Gartner Inc., on the other hand, concedes that things seem bleak. It's during bleak times, however, that outsourcing has traditionally thrived.

"Although things look gloomy for the larger global economy, the outsourcing market represents a dichotomy: on the downside, organizations' cost-cutting outsourcing strategies may negatively impact market growth, but at the same time, the upside is that outsourcing will be adopted by more organizations to help them work through financial and competitive challenges," said Allie Young, vice president and distinguished analyst at Gartner, in a statement.

What it all adds up to, say Young and Gartner, is the potential for outsourcing to make big gains. "The well-educated buyer and provider will have the advantage. The potential for outsourcing to address immediate cost pressures as well as long-term recovery goals will be unprecedented," she said. "However, only organizations that are diligent about understanding and avoiding the pitfalls of cost-focused outsourcing and that apply business-outcome-focused outsourcing will be successful."

In the near-term, outsourcing activity could temporarily contract, as companies focus on cost-cutting and re-evaluate existing outsourcing commitments. Arrangements that haven't resulted in anticipated efficiencies, synergies, or -- most importantly -- cost savings could go by the board, Gartner suggests.

That’s not all. Many customers will look to tweak their outsourcing arrangements -- chiefly in response to changing corporate fortunes, such as downsizing and merger-and-acquisition activity.

At the same time, shops that have thus far refrained from outsourcing -- or which have waded only tentatively into the outsourcing waters -- could aggressively enter the mix, particularly if the economic situation worsens. For these customers, Gartner says, the impetus isn't so much to cut costs (although cost-cutting should remain an important driver) than it is to refocus their efforts on core business competencies. That means divesting themselves of non-core responsibilities -- such as information technology.

A Buyer’s Market

Regardless of who's outsourcing, or why, it should be a buyer's market. Over the coming year, Gartner forecasts, competition in the outsourcing segment will be especially fractious. Given the outsourcing segment's history of turnover -- last year, Gartner says, more than three-quarters of all announced outsourcing contracts were new deals -- the coming year could test even the most well-founded of client/provider relationships.

"Almost one-quarter of contracts [announced in 2008] were a continuation of outsourcing with an incumbent provider. With the continued uptake in selective outsourcing, a provider can remain a key supplier of services to a particular client, yet potentially lose a portion of its historic contract value," Young said. "Key providers are betting their future on forming enduring, long-lasting client relationships. In uncertain economic times, outsourcing relationships can prove -- and test -- the durability of relationships and the outsourcing value proposition."

Elsewhere, Gartner forecasts, so-called "alternative delivery models" (or "ADAMs") could surge in popularity. ADAMs include non-traditional procurement schemes, such as cloud computing or software as a service (SaaS). Other ADAM-like arrangements include "business process utility" (BPU), "infrastructure utility" (IU), and "remote management services" (RMS), according to Gartner.

You’ll hear much more about ADAMs in the coming half-decade, Gartner predicts. "ADAMs are becoming more pervasive in many, if not all, aspects of IT development, delivery and management," said Ben Pring, research vice president at Gartner, in a statement. "Market excitement over new delivery methods is intensifying and whetting buyers' appetites for new options and services that promise greater flexibility, speed-to-solution, lowered capital investment, and pay-for-use models."