Outsourced Development Growing: Should You Worry?

By Donald Sears  |  Posted 2008-07-17 Print this article Print

In times of economic uncertainty (as in, right now), adding headcount is like a game of freeze tag.

The bean counters run around the office with spreadsheet formulas chasing the business, figuring out what's worth getting pushed in the ice tray and what stays a funding priority. IT, no matter the size of the organization, always feels like it's getting the 32-degrees-Fahrenheit treatment. And yet, there is some critical work on IT projects that must get done.

How does some of that key work get accomplished? Some might stay with team members and in-house experts in specific, custom and well-invested technologies that can't be seen outside the firewalls or aren't worth the risk. But increasingly, farming out work to outsourcing providers continues. The money arguments are well-established.


A recent study from Computer Economics from earlier this month highlights that very point. A few things are certain: Some application development is being farmed out; When budgets were done for 2008, your CIO and CFO were feeling cautious about the economy; And, new hiring is fairly flat.

Computer Economics' annual "IT Spending, Staffing & Technology Trends" study has been going on for 19 years and surveys 200 IT executives in 11 sectors of U.S. and Canadian business in thirds of small, mid and large companies (sampling size is about 11 to 18 companies in a sector, and the financial range of small to large starts at $50 million to more than a $1 billion).

This outsourcing piece is a lower priority for companies, according to John Longwell, director of Research of CE, but does show a continued reliance on the practice with some "incremental increase for those companies that already outsource."

The study, which is sold to CIOs, IT, finance and large IT consultancies in the neighborhood of $9K a pop to subscribers (as told from Longwell), provides potentially valuable benchmarking on the IT business as a whole. The full report (at a hefty 25 chapters) is used to compare the IT operation to others in same industry. Makes sense. CIOs tend to look for healthy ratios of 70 percent operational management, 30 percent new development, according to Longwell.

One of the reasons that Longwell may be de-emphasizing the outsourcing finding is that some of the other key findings show IT operational growth based on budgets slowing down to 2006 levels (4 percent). Additionally, the top priorities for 2008 have shifted. In 2007, the top spending priority was on new development. This year, it's not in the top five. All the risk management categories are dominating.

From the study: "Every one of the 11 categories of IT outsourcing tracked in our study this year shows an increasing amount of outsourcing taking place... 15 percent of organizations that are outsourcing application development plan to increase the amount of work given to outside service providers."

What isn't clear is where they are outsourcing this development work, and whether that work is going to places where the labor for coding is much cheaper. What's your company outsourcing?Is it dev?

I was curious, so I went back to Longwell for some clarification. He did give me something not in the major findings: Of those companies that are outsourcing, only 7 percent of the median are offshoring. It's not huge, though, remember that many companies on our North American mainland are offshoring basic coding for things such as databases and ERP systems.

It's also not clear how critical the development that is being outsourced is to the business, but one can assume that if it's getting funded, the CIO, with blessing from the CFO, has approved it.

The incremental growth in outsourcing seems to say to me that trust in service providers could be on the uptake. But without seeing the specific survey questions asked, vendors used, specific type of work being done, etc., it's pretty hard to know for certain. Computer Economics did not give up the entire report, which is too bad, but they need to make a living like every other research company. They live in a competitive space in challenging economic times, just like the rest of us.

The data center, help desk and desktop support numbers are not surprising given the commodity nature of those functions. Is application development as a commodity growing? This outsourced piece could very well be the kind of development that has become that very thing. Is it the kind of development you worry you'll be replaced with down the road?

You know what sectors are growing their IT spend above 4 percent in 2008? It's not health care, manufacturing, retail or banking and finance. Oh no.

Energy and utilities, high-tech, professional services, wholesale distribution and insurance.

Huh. No wonder I keep seeing those TV commercials from T. Boone Pickens.

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