Cloud erodes global IT services value as budgets remain tight

The amount spent on IT and BPO services globally drops as businesses restructure contracts with emerging delivery options such as cloud

The total amount spent on IT and BPO services globally is collapsing as businesses restructure contracts in the light of changing delivery options.

Renegotiations, cloud computing and offshoring on top of continued pressure on IT budgets is eating into the total spend on IT and BPO services globally. In line with efforts of businesses to get more for less, outsourcing will continue to increase but less money will be spent on it.

Research from Pierre Audoin Consultants (PAC) revealed the total global value of BPO and IT services contracts dropped from €85bn in 2010 to €48bn in 2012. In 2011 the figure was €53bn, according to PAC. PAC’s Deal Tracker records all publicly disclosed IT services and BPO contracts.

PAC does not expect the value to rise significantly because broad-reaching deals will be fewer, IT budgets will remain tight, offshoring will become the norm and cloud delivery will increase.

Philip Carnelley, research director at PAC, says businesses are moving away from deals combining multiple services, in favour of breaking them up. Carnelley said this is contributing to reduced overall spending. 

“A few years ago there was a trend for businesses to outsource long and broad contracts to people like IBM. But today businesses are signing shorter contracts,” said Carnelley.

Restrained IT budgets

An overriding driver is the fact that businesses have less to spend because IT budgets remain under pressure.

Carnelley says many contracts are maturing and businesses are taking the opportunity to change terms and conditions when contracts come up for renewal.

“Contracts that are up for renewal have already made the savings that businesses wanted, so they will look to make new savings. This means they want a lower price,” said Carnelley.

“Economic conditions remain tough in all regions and clients remain wary about committing to long-term IT services contracts. Experienced, battle-hardened buyers continue to negotiate more favourable rates from their suppliers, with existing deals typically trimmed 30-40% at renewal time."

PAC cites three other broad trends that are combining to drive the total cost of BPO and IT services down.

These include the fact that deals continue to be more focused. “The shape of contracts will continue to evolve as clients move away from broad-scope outsourcing deals and time-and-materials project services contracts, towards commercial models focused on delivering fixed outcomes and business value,” said PAC.

Last year Rolls Royce moved from a single-source deal with HP to a multi-sourcing environment, with Capgemini appointed to the role of service integrator.

PAC says the cloud is slowly cannibalising traditional revenue streams as the lower-cost offshore delivery becomes the norm.

“In the last 12 months, we have seen major new offshore-centric projects announced by Apple, ING and Shell. And low-cost delivery is becoming increasingly attractive to businesses in areas of continental Europe, and particularly in the Nordic region where major new offshore deals have been signed off in 2012 by Nordea, SAS, UPM Kymmene and TDC,” said PAC.

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