Outsourcing of App Development Projects Is on the Decline

What is the most popular area of IT outsourcing? According to one study, it is and has been application development for the past three years, but it is declining. In 2009, 33 percent of 200 companies surveyed by Irvine, Calif.-based research firm Computer Economics outsourced application development. Those numbers are down roughly 20 percentage points from the previous two years (53 percent in 2008; 52 percent in 2007).

"Such a precipitous drop indicates the overriding factor driving the downturn was the deepening recession, which caused many organizations to curtail spending on new initiatives and delay ongoing projects where possible," wrote Computer Economics on its Website on the report IT Outsourcing Statistics 2009/2010: Outsourcing Trends and Cost Experiences for 11 Key IT Functions. "As application development is project-based, application development outsourcing activity is far more subject to swings in the economic cycle than outsourcing of data center, help desk or other IT functions. Outsourcing activity declined across the board last year, but no single function declined more than application development."

Though application development is the single largest category in outsourcing, data center operations, help desk, disaster recovery, Website and e-commerce systems and desktop support have gained significant ground (between 21 and 28 percent of companies surveyed), according to the study. The least popular area of IT outsourcing is, understandably, security, with only 19 percent of organizations allowing an external service provider to handle this important data management and customer record protection function.

Regardless of company size, outsourcing generally accounts for 5 to 6 percent of a total IT budget. Large organizations are much more inclined to use outsourcing companies for help desk support.
Other key findings from the report include:

"IT organizations are experiencing the most cost overruns with application development, Website/e-commerce systems, and data network operations outsourcing contracts. They
have the easiest time predicting costs for IT security, voice network operations and data center operations outsourcing contracts.

"Application development and application maintenance are most-frequently offshore outsourced IT functions, while disaster recovery services and IT security are the two functions least likely to be sent to offshore service providers."

What's on tap for 2010? With consolidation of top-tier vendors such as HP, EDS, Xerox, Perot and others, competition could heat up, so expect competitive pricing between the small, mid-tier and large outsourcing vendors.

"From acquiring former staff of top-tier providers to snapping up now empty chairs at the bidding table, competitive providers may be able to leverage this chance to grow capability and market share in 2010," said Charles Arnold, a director at EquaTerra, in the CIO article 10 Outsourcing Trends to Watch in 2010.