What next for IT outsourcing as the mega-deals decline?

The UK has long been hooked on IT outsourcing – far more than any of our European neighbours. But is that enthusiasm on the wane?

In recent weeks, market research from several analyst firms have proved contradictory. Gartner reduced its forecast for outsourcing sales in Europe, citing the economic climate. Ovum, meanwhile, predicted an increase in 2013, saying that growth would outstrip that of 2011 and 2012. But then Information Services Group suggested there was a 23% year-on-year and 16% sequential drop in European outsourcing spend in the second quarter of this year.

Computer Weekly’s own reader research suggested a notable decline in IT services spending in favour of more staff recruitment and growing use of cloud. Anecdotally, from talking to UK IT leaders, the mood seems to be increasingly negative towards the role of outsourcing – or at the very least, CIOs are looking at it in a different light.

For many organisations, the days of the outsourcing mega-deal are over. There will be exceptions, of course, but most of the big, five-year or longer deals signed in the mid-2000s were not renewed. Instead, they were broken down, either into smaller deals with multiple suppliers, or to bring large chunks of that work back in house – or lately, to move it into the cloud.

One thing is for certain, the days of “transformational outsourcing” are over. That phrase was popularised by EDS, then the giant of the sector before its troubled acquisition by HP, and set the expectation that services firms would bring great change and innovation, using their advanced IT skills, to the benefits of customers.

For most CIOs, that turned into greatly complicated service-level agreements, innovative ways to charge more money, and an inability to respond quickly to business needs by supplier staff too far removed from the objectives and culture of their clients.

Take the public sector as the prime example. The disillusionment in Whitehall with the big services firms that have run most of government IT runs deep. Most of those contracts, signed under the Labour administration, are up for renewal in the next couple of years, and will not be continued.

Government wants more skills in-house, and a more diverse supplier base, encouraging more small suppliers to loosen the hold of the big system integrators. Many private sector firms want the same thing.

That’s without even mentioning some of the non-IT outsourcing scandals of late, such as G4S and Serco overcharging for services.

Outsourcing will always play a part, but with the growing realisation in boardrooms – and Cabinet rooms – that technology is strategic to the business and internal IT skills are the key to becoming digital organisations, it will be seen and used in a very different way in this decade from the last.

Outsourcing works best for predictable, standardised processes and operations, with manageable change. For the agile, fast-moving, digital business of the future, the outsourcing suppliers would need a very different approach, as in-house IT provision becomes increasingly strategic.