Is IT Outsourcing Stagnant?

 
 
By Stan Gibson  |  Posted 2006-01-23
 
 
 

While there is much talk about outsourcing and services being the future of IT—and IT becoming, in effect, a service—it seems that IT outsourcing is actually not growing—depending on what statistics you look at and which you believe.

TPI, a sourcing advisory company, reported that in 2005, the total value of global commercial outsourcing contracts declined by about 4 percent to $75 billion, from $78 billion in 2004. The figures come from TPIs year-end market observations in its TPI Index, a quarterly report on the state of the global outsourcing industry.

Click here to read about how GM is shaking up the outsourcing industry.

A big reason for the drop is a decline in the value of mega-deals: contracts worth more than $1 billion each. In 2005, the total contract value of such mega-deals was just under $27 billion—the lowest such total since 1996. TPI predicts that the first absolute decline in commercial IT outsourcing revenue could occur between 2006 and 2007.

Whats going on? Peter Allen, TPI partner and managing director, said there are three main factors. First, contracts are being crafted more narrowly. Customers are seeking several best-of-breed providers, rather than a single contractor; in other words, they are multisourcing.

Second, customers are leaving capital equipment purchases out of their outsourcing deals, which decreases contract values. Third, more work is being done offshore in lower-cost countries. This makes the size of the market look flat or declining, even though more work actually may be being done.

Offshoring certainly seems like a plausible explanation. IBM Global Services executives, for example, have touted that Big Blue units recent increases in productivity, noting that a sizable chunk of it has come as a direct result of the growth of IBM units in India and elsewhere. Further proof comes from the spectacular growth of key Indian providers, such as Tata Consultancy Services and Infosys.

Stan Gibson says that outsourcing is growing up. Click here to read more.

TPI also noted that 2005 was a big year for contract restructuring. EDS, which got into trouble by signing a bunch of bad deals, such as the Navy Marine Corps Intranet, has been restructuring many of them. The United Kingdoms Bureau of Work and Pensions fully restructured its deal with EDS in August. But Allen said other companies have been busy restructuring as well. Computer Sciences Corp., in fact, was the services provider with the largest number of restructurings last year, he said.

Allen said TPI has factored in the impact of General Motors big contracts. The companys IT budget is about $3 billion, and most of that has been put out to bid, with contract winners to be announced as soon as this week. He denied that GMs big numbers skew his results in any way, although he did say he expects GMs total IT budget to decline from its current level, as running a tighter ship is one of GMs top priorities.

Out and about

Word that hp may be considering acquiring Computer Sciences Corp. provided fuel for speculation among competitors and analysts, the general consensus being that HP finally may be coming up for air, having spent the last couple of years digesting big contracts such as Procter & Gamble.

Allen said the deal would be consistent with consolidation in a market that is not expanding. Some HP critics questioned the companys wisdom in taking on another big acquisition when it has barely recovered from its acquisition of Compaq.

HP, no doubt, is driven by the need to acquire more expertise, along with a significant client portfolio, in order to match up better against IBM Global Services. But I wonder what is keeping the company from growing its services business internally.

Lets not forget that a few years before HP acquired Compaq, Compaq had acquired Digital Equipment Corp., once a significant provider of data center management services itself and a rival to IBM Global Services. Ancient history? Perhaps, but whatever happened to the Digital services business? Did it just disappear? If so, it helps disprove the notion that the best way to build a services business is through acquisitions.

E-mail Stan Gibson at stan_gibson@ziffdavis.com.

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