IT Outsourcing Market Growth Slows, Offshoring, Cloud Computing to Increase: Report

In spite of significantly slowing down the,IT Outsourcing, or ITO, market growth, the global economic slowdown has had a moderate impact on ITO in 2009, in terms of non-secular trends  - such as pressure on pricing, deal sizes, and pipeline uncertainty. Revenue slowdown has been driven by decision making on outsourcing deals being subject to disruption when management teams are distracted with shocking news flow. 

While the economic slowdown is usually good for offshore adoption, it is bad it says for overall IT spending, which will continue creating an overall mixed effect on offshore spending.  

Increased near-term cost-optimization pressures will drive a continued decline in mega-deals; increase in competitive intensity for renewals and re-competes will likely be seen. 

The application development and maintenance market will continue on its path to increasing maturity. Key suppliers will develop innovative contracting and pricing structures, which will shift more risk away from the buyers. Discretionary spends such as IT consulting, which hit a trough in Q1 2009 will make a slow recovery through 2010, as buyers gradually shift focus to more strategic projects. “However, the pace of this change will be dictated entirely by the improvement in the global business environment.” 

Several Indian and multinational suppliers made acquisitions in 2009 for building capabilities or achieving inorganic growth, such as with mergers and acquisitions. These are now reaching critical mass, with acquired capabilities leveraged to win new business or cross-selling existing ADM services to clients of the acquired entity.  

ADM suppliers will spend much of 2010 recovering from headwinds such as pricing pressures and anti-off shoring rhetoric. This will require, says Everest “fundamental changes in their delivery model, such as local/ onshore hiring, which could impair market growth.” 

Infrastructure outsourcing will continue growing at a sustained pace in line with the rest of the IT industry. 

The key theme in 2010 will be the emerging modularity in IO services. With nascent innovations such as cloud computing and SaaS (News - Alert), IO suppliers are “poised to offer buyers more and more modular, plug-and-play services coupled with pay-as-you-go pricing. However, while the SMB segment is already an early adopter, large enterprises will prefer to wait for technical and business challenges to be resolved before they adopt this service delivery model.” 

Both offshore and multinational suppliers have aggressively built offshore labor capabilities to bolster their IO value proposition. As IO still lags ADM in terms of labor arbitrage adoption, the use of offshore resource pools for delivering IO services will increase.

2010 will see a revival of growth in off shoring. As the economy recovers, organizations will increasingly drive adoption of off shoring across various lines of business. However, the growth is likely to be lower than historic levels.  

An increasing number of companies, especially in Continental Europe, will adopt off shoring. Financial services companies in the United States and U.K. will re-emphasize off shoring as a strategic lever, “given greater certainty around their core businesses.” Suppliers will focus on increasing their offshore mix to cater to increasing buyer demand.

 Companies will increase their leverage of high-value services such as decision analytics, data modeling, and research through the offshore model.

 Leading companies will actively start evaluating location network strategies. Companies will add new delivery locations in emerging locations such as Africa, and Central and Latin America. While both India and Philippines will experience a growth revival, towards late 2010, this may lead to temporary talent shortages and spikes in wage inflation and attrition. The share of tier-two cities in new activity will continue to be high. This will be most prominent in India and Eastern Europe and to a lesser extent in the Philippines and Latin America. 

As the market recovers in 2010, suppliers will see a resurgence in demand for various IT and business process outsourcing services. However, growth rates are unlikely to return to pre-2008 levels.  

To support long-term growth, suppliers will focus on developing end-to-end capabilities and focus investments on non-traditional areas across functions, verticals, and geographies to de-risk their businesses.  Pure-play BPO suppliers will make investments, including acquisitions, to develop IT capabilities. Suppliers will invest in verticals beyond financial services such as retail, healthcare, pharmaceuticals, energy and utilities, and media and entertainment. Also emerging client geographies such as Continental Europe and Latin America, and domestic markets in India and China will witness increased interest and activity. 

M&A activity will witness an upswing in 2010. As opposed to acquisitions by suppliers to increase scale, most acquisitions in 2010 will focus on adding adjacent and complementary capabilities across functions, verticals, and geographies. M&A activity will also gather momentum in countries such as the Philippines, China, and Latin America, where the local suppliers are relatively less mature.