Explosive IT outsourcing figures mask industry realignment

The latest figures on global IT outsourcing sales from ISG reflect a realignment in IT services as they are bought in different ways

The latest figures on global IT outsourcing sales from ISG reflect a realignment in the outsourcing industry as businesses buy IT services in different ways.

IT’s growing role as a business enabler, as well as the continued take up of cloud computing, means IT outsourcing is emerging from the recession as a very different beast to the one that entered recession.

ISG’s figures for global IT outsourcing deals in the third quarter of this year revealed 125 IT outsourcing deals in Europe  worth €2.3bn. The value of IT outsourcing contracts signed was the second highest recorded in a quarter, and was 177% higher than the previous quarter with almost double the number of deals.

John Keppel, president ISG Northern Europe, said although the figures were particularly high because the previous two quarters had been slow and demand had built up, there are signs of turnaround.

“The sudden increase was partly because the previous two quarters were slow but more businesses are now investing in transformation projects rather than cost reduction projects,” said Keppel.

“Things are turning around and businesses are becoming more positive. Spending is not back to pre-recession levels but we are coming out of the 0% spending period.”

Keppel said that as the IT outsourcing industry picks up, a major transformation is occurring, while trends such as digitisation put IT at the heart of business. “IT services will never be bought in the way they used to be. We will have a lot of IT spending but it will not be reported as IT spending.” Keppel believes that a lot of IT outsourcing spending will go under the banner of business process outsourcing (BPO) as the heads of departments outside IT make the decisions about IT services.

“Soon we will just talk about BPO and not ITO because IT is just the enabling part of a business service.”

ISG also said cloud computing is making significant inroads into the IT outsourcing sector with it accounting for up to 15% of the value of total deals. This compares to between 5% and 8% a year ago. “In the last 24 months cloud has gone from a little bit of hype to something big enterprises are using,” said Keppel.

He believes that IT spending is going back to how it was before businesses centralised it under a CIO. “IT got centralised to control spending but now it is moving back out and the business departments are making decisions.

Another reflection of how the industry is changing was ISG’s decision to change how it measured contracts. A few months ago the company decided to measure annual contract values (ACV) rather than total contract values (TCV). This was because in the past, deals are being broken up into smaller chunks and paid for every year rather than up front. ACV was seen as a better measure as it would measure the annual value of all contracts regardless of term.

Keppel said if cloud computing reaches its true potential the term of a contract will be irrelevant because customers will be able to “switch services on and off.”

While the overall industry changes, one sector is becoming more important. The increasing significance of public sector spending has led ISG, which acquired TPI and its regular reports on the outsourcing sector, to do specific reports on public sector IT outsourcing spending for the first time. “We will be doing a full year report on public sector outsourcing for the first time this year because it is growing in importance to us and the market” said Keppel.

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