Outsourcing: Is There an Uptick Ahead?

Analysts split on outsourcing's prospects in a downturn.

During the last economic downturn after the dot-com implosion, a number of organizations shifted IT work to outsourcing providers, many of them overseas.

Amid the current economic uncertainty, market watchers can't agree on the direction outsourcing will take. Some businesses will probably opt to kill existing outsourcing arrangements to cut (or at least freeze) costs, but some in the industry expect the economic downturn to result in a net gain for outsourcers.

According to Forrester Research Inc., which in January issued its revised IT spending forecast for 2009, IT spending as a whole will fall by 3 percent, triggering an attendant drop in outsourcing activity. "Global IT services and outsourcing will decline," read a recent Forrester release.

The upshot, according to the firm, is that government and private-sector customers will spend 3 percent less on outsourcing this year than they did in 2008. "IT outsourcing services will do a bit better than IT consulting and systems integration services, with the latter vulnerable to the slowdown in purchases of software to be implemented and integrated," Forrester concluded.

On the other hand, market watcher Gartner Inc. conceded that things seem bleak-and that it's during bleak times that outsourcing traditionally thrives.

"Although things look gloomy for the larger global economy, the outsourcing market represents a dichotomy: On the downside, organizations' cost-cutting outsourcing strategies may negatively impact market growth, but at the same time, the upside is that outsourcing will be adopted by more organizations to help them work through financial and competitive challenges," said Allie Young, vice president and distinguished analyst at Gartner, in a statement.

Successful Strategy
What it all adds up to, according to Young and Gartner, is the potential for outsourcing to make big gains. "The well-educated buyer and provider will have the advantage. The potential for outsourcing to address immediate cost pressures as well as long-term recovery goals will be unprecedented," Young said. "However, only organizations that are diligent about understanding and avoiding the pitfalls of cost-focused outsourcing and that apply business-outcome-focused outsourcing will be successful."

In the near term, outsourcing activity could temporarily contract as companies focus on cost-cutting and re-evaluating existing outsourcing commitments. Arrangements that haven't resulted in anticipated efficiencies, synergies or cost savings could be in trouble, Gartner said.

That's not all. Many customers will look to tweak their outsourcing arrangements chiefly in response to changing corporate fortunes, such as downsizing and merger-and-acquisition activity.

At the same time, shops that have thus far refrained from outsourcing -- or have made only tentative outsourcing moves -- could aggressively enter the mix, particularly if the economic situation worsens. For these customers, Gartner said, the impetus isn't so much to cut costs (although cost-cutting should remain an important driver) but to refocus their efforts on core business competencies. That means divesting themselves of non-core responsibilities, such as information technology.

Buyer's Market
Regardless of who's outsourcing or why, it should be a buyer's market. Over the coming year, Gartner predicted, competition in the outsourcing segment will be especially fractious. The outsourcing segment has a history of turnover. According to Gartner, last year more than three-quarters of all announced outsourcing contracts were new deals.

About the Author

Stephen Swoyer is a Nashville, TN-based freelance journalist who writes about technology.