Utility companies will increasingly outsource IT to cut costs, according to the latest research from Ovum.
The analyst firm expects a recent increase in IT outsourcing among utility firms to accelerate. Ovum analyst Stuart Ravens says utility companies have traditionally been conservative in terms of outsourcing.
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"However, we have already seen a weakening of this conservatism, with a small but significant number of IT outsourcing contracts awarded in recent months. We believe this number will steadily increase over the next year and beyond. With unprecedented pressure to drive down costs, many utilities are realising that they can no longer afford to ignore outsourcing," he said.
"They are being driven down this path by a number of market forces, including the need for new infrastructure investments, ongoing industry consolidation, and increasing interest in smart energy initiatives."
A recent mega-deal signed by E.ON with two suppliers is an example of the utility sector embracing outsourcing. E.ON is to pay HP $1.4bn (£897m) over five years to provide datacentre and desktop services to over 80,000 workers. A total of 1,100 E.ON employees will transfer to HP in April.
T-Systems also won a €1bn contract with the energy firm that will last between five and seven years. It will take over responsibility for the management of voice and data networks, and about 220 workers will transfer to T-Systems from E.ON.
Centrica recently signed a deal to take advantage of onshore and offshore software testing skills through an £8m deal with Software Quality Systems (SQS). The 12-month managed software testing contract will test business critical systems such as those being used in Centrica's smart metering programme.
Robert Morgan, director at sourcing broker Burntoak Partners, says there is more activity in the utilities sector: "I don't think there will necessarily be lots of deals the size of the E.ON deal but there will be more deals."
He says utility firms are heavily regulated and are under pressure to show they are cutting overheads. "Prices are rising in this sector and the regulators want to know that companies are doing everything they can to lower their costs," said Morgan.
He says many functions within utility companies can be outsourced and IT is a major part of this,
"Utility companies can show the regulators that they are doing their best to cut costs by outsourcing a process to an experienced, lower cost specialist supplier," said Morgan.
He adds that there could also be some consolidation in the utilities sector which may result in further outsourcing deals.