EU

Outsourcing wobbles: Blip or something more telling?

The latest stats might suggest all is not well with outsourcing, but the expert view tells a different story.

Despite falls in contracts and deal value, the arguments in favour of outsourcing persist. Image: Shutterstock

Outsourcing is apparently going through a tough period, with spending and new contract numbers down and a sizeable proportion of IT leaders unhappy with existing deals.

But experts say outsourcing still offers a number of benefits to business and will continue to grow, despite the present issues.

Figures from the ISG Outsourcing Index, covering contracts worth more than €4m annually, show that EMEA deals in the first quarter of 2013 totalled €1.5bn, a 20 percent decline over the same period in 2012 and a 30 percent fall on the previous quarter.

In the Americas region the decline was more pronounced, with the total deal value of €1.2m, down 39 percent on the same quarter in 2012.

The number of new EMEA contracts also fell - to 105 deals, a 15 percent year-on-year fall. In the Americas the decline was again greater, with the 90 contracts representing a 38 percent reduction.

Decline in mid-sized outsourcing deals

However, ISG director David Howie said when it comes to larger deals, the picture remains relatively strong. The fall has been greater in medium-sized deals.

He also distinguished between the fortunes of IT outsourcing (ITO), which shows declines in EMEA and the Americas region, and business-process outsourcing (BPO), which is growing in America and only marginally declining in Europe.

"Actually, we're optimistic there is underlying strength in the European BPO market. It's just that we didn't see those one or two big deals that would have made the numbers far rosier. But we would expect them to pop up in the next quarter," Howie said.

"However, the ITO numbers are weak - and they are weak in the US as well - and we don't have single explanation for that. Clearly, all these figures lag the activity because they represent deals being signed which then take some time to filter through," he added.

Leslie Willcocks, professor of technology, work and globalisation at the London School of Economics, said there is no let-up in the overall growth in ITO and BPO, even though there are sometimes big variations between different regions and countries.

"Undoubtedly the recession is having effects, but in some ways it leads to outsourcing growth and ways of cutting cost and headcount. There are also countervailing trends - for example, governments doing or gearing up to do more outsourcing," according to Willcocks.

Outsourcing deal numbers

ISG's David Howie also argued that the figures are affected by the present economic slump but felt there is more clarity about the next few years.

"It's going to be grinding along but at least there is less uncertainty. As a result activity has picked up. If you look at the deal counts in EMEA, they are pretty healthy. They've tailed off a bit but it's still there or there-abouts," Howie said.

"There is an issue and it must be related to macro-economics in some way. There's a sense in which because the deal numbers are sort of OK then some of the decline in the [amount being spent] is due to smaller contracts being sold, which in part could be just due to a lot of cost pressure on those contracts," he said.

The emergence of the cloud may also be muddying the figures, with some things that would have been in a traditional ITO services contract now bundled up under a cloud deal and appearing potentially as a BPO.

"It may well be that there is a tiny bit of cannibalisation between BPO's strength and ITO's decline but I think that is only part of the story. There's a genuine drop off in ITO annual contract value," Howie said.

The LSE's Professor Willcocks also doubted that the cloud is having a big effect on outsourcers' earnings.

"A lot of service providers are cloudifying their offerings or at least selling cloud capability as well," Willcocks pointed out.

Dissatisfaction with outsourcing deals

Meanwhile, a study from outsourcing consultancy Alsbridge suggests that about one in four IT leaders is unhappy with at least one of their existing contracts. Three out of four are thinking about renegotiating or retendering two or more outsourcing deals.

Some 40 percent of those IT leaders polled also said they had left too many details to be confirmed after the signing of the contract.

The main reasons for wanting to renegotiate are changing technology needs, cited by 54 percent of respondents, a reduction in the benefits derived from the arrangement, 49 percent, and a need for a new delivery model, 48 percent.

Other reasons include changing business needs, a fall in the market rates, and a need to cut costs, all cited by 46 percent of IT leaders.

About

Toby Wolpe is a senior reporter at TechRepublic in London. He started in technology journalism when the Apple II was state of the art.

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