Businesses are stepping up their spending on outsourcing as they begin to replace outdated infrastructure, a major survey of UK IT service providers reveals.
But the growth in demand for outsourcing is still precarious, and could be held back if the economy falters, EquaTerra's UK pulse survey reveals.
"We are seeing more infrastructure projects - datacentre, desktop services, network services. They are being looked at now because the underlying asset is at the end of its life," said Lee Ayling, managing director for IT outsourcing UK at the company.
The majority (71%) of the IT service providers surveyed predict that demand for outsourcing will grow over the next six months, up from only 26% in the second half of 2009.
Financial services organisations are leading demand, followed by government, energy and utilities, oil and gas.
Lower prices, greater value
"We are seeing some very large programmes in SAP and Oracle - programmes that were put off during the downturn. They are often quite expensive and risky programmes with discretionary spend," said Ayling.
Although companies are spending more on outsourcing, they are demanding lower prices and better value from their suppliers.
More businesses are running price/performance benchmarks on prospective outsourcers, the survey reveals.
And an increasing number of businesses are renegotiating existing deals to change the scope of their services, terms and conditions, and performance levels.
"They are asking for more standard services, rather than bespoke services which are more expensive. There is much more use of leveraged services [in which services are shared between several customers]. Smarter service providers are offering more of those standard services," said Ayling.
Better contract management
But organisations are still struggling to manage outsourcing contracts effectively. They need to improve the way they manage service contracts, get buy-in from senior executives, and become better at translating business needs into outsourcing requirements, say service providers.
"Managing outsourcing is becoming more and more of a competence. Some are really good at it. Others think of it as an afterthought. It is getting more and more polarised," said Ayling.
The main reason outsourcing deals fail to reach fruition is that businesses lack an adequate business case, the research shows. Management and governance challenges, and internal political pressure are also strong factors in deals collapsing.
"As outsourcing becomes a key part of business structure, the board is more aware of the need for effective governance to sustain the business case. Where we would not have had to go to the board in the past, we now have to go to the board to sign off the project. That happens for projects with smaller budgets than before," he said.
Public sector outsourcing
The prospect of heavy public sector cutbacks later this year is likely to boost outsourcing in the public sector, EquaTerra predicts.
"I think the government is going to outsource more," said Ayling. "It will need to look at offshore outsourcing, even though it is politically sensitive."
Government departments are unlikely to cancel any major IT outsourcing contracts because of the risk of high penalty clauses, but they are likely to seek to renegotiate their terms, he said.
"There are some great examples of government using outsourcing effectively. The services they buy bring value for money. I think they are going to focus more on their incumbent outsourcing agreements. They are probably going to try to negotiate better price points, " he said.
Despite the upturn, EquaTerra warns that the recovery in outsourcing is fragile.
"I think the economy is far from stable. Outsourcing decisions are very sensitive to big procurement decisions. The pent-up demand is because businesses have to replace systems, but they are still oscillating between 'we have do it' and 'do we really want to do it?'. I am not celebrating yet," said Ayling.