IT Budgets Rise, but Businesses Cut Back on IT Outsourcing

Application hosting has become the most frequently outsourced function, displacing application development, a Computer Economics report found.

IT outsourcing as a percentage of the IT budget dropped this year, reversing a four-year trend and marking the first time since the start of the recession that IT organizations have begun shifting spending plans on a percentage basis toward developing internal operations and capabilities and away from outsourcing partners, according to a report by research and advisory services specialist Computer Economics.

Survey results suggested organizations are starting to "back-source" their IT services, bringing them back in-house after a period of growth in the use of service providers. The decline in IT outsourcing was reported as significant, down from an average 11.9 percent in 2012 to 10.6 percent in 2013. Meanwhile, IT operating budgets are rising 2.5 percent this year at the median, and IT capital budgets are up 4 percent.

"With the tentative improvement in the economic outlook, IT organizations are putting newfound resources into internal operations and capital investments at a pace that is greater than their spending with IT service providers," the report noted. "IT outsourcing budgets are not necessarily shrinking so much as IT budgets are rising. The denominator is rising faster than the numerator."

The report found the IT functions with the greatest potential for successfully reducing costs through outsourcing are desktop support and disaster recovery, and the functions with the greatest potential for improving service through outsourcing are Web and e-commerce operations and IT security.

Application hosting has become the most frequently outsourced function, displacing application development. Application hosting also continues to be the fastest-growing outsourcing function in the study, a reflection of the growing popularity and strength of software as a service (SaaS).

While the study noted that the amount of the typical portfolio being hosted by outside parties remains low, the number of organizations outsourcing application hosting is up nearly 10 percent year over year, and 57 percent of all organizations that outsource this function are planning to increase the amount of work they outsource.

"In the early stages, IT organizations first turned to service providers out of reluctance to hire permanent staff. Now they are turning their attention to long-delayed infrastructure upgrades, system improvements, and unfilled positions," the report said. "Some organizations may be making strategic decisions to back-source as well, if they find they have the economies of scale to efficiently deliver IT services."

Midsize companies became the leaders in outsourcing this year, spending a higher percentage of their IT budgets on outsourcing than large organizations. This is a reversal of previous years, when large organizations were spending the highest percentage of their IT budgets on outsourcing.

The report said the reason for the shift is that large organizations are also experiencing the most growth in their IT budgets. The study defines large organizations as having IT budgets of at least $20 million.