The outlook for the IT outsourcing market is not unlike the outlook for the economy as a whole: It's "unusually uncertain," to use U.S. Federal Reserve Chairman Ben Bernanke's words.
IT outsourcing activity for the first half of 2010 is up 5 percent over the first half of 2009, but that's only because of all the restructuring and renegotiating that occurred in the first three months of the year, according to outsourcing consultancy TPI. The total contract value of IT services deals signed in the second quarter of this year (April through June) is down nearly thirty percent over the first quarter and 23 percent year-over-year. TPI notes there were few big deals among the 89 IT outsourcing contracts worth $12.2 billion dollars awarded between April and June.
"The global uncertainties of the economy are definitely weighing on the ITO market," says TPI partner Mark Mayo. "Clients are relatively slow to make significant outsourcing decisions."
Business process outsourcing activity, which often spurs IT outsourcing deals, also continues to be slow.
Industry watchers expected that the pipeline of IT services deals would return to more robust levels by now, and Mayo says he does expect the outsourcing market to recover eventually.
In the meantime, outsourcers are working their current customers for new revenue. "Tactically, many service providers are focused on expanding their services with existing clients in smaller scopes, always a good strategy in tough economic times," Mayo says. "We are not seeing a lot of low-ball pricing."
One surprising area of growth in the second quarter was bundled application and infrastructure deals. "This is definitely counterintuitive, as clients are still tending to leverage a best-of-breed, multi-vendor approach," Mayo admits.
Bundled deals grew 95 percent year-over-year and 105 percent over the first quarter. Meanwhile, application- and infrastructure-only contracts were down 34 percent and 48 percent, respectively, over the first quarter.
Some of the activity can be attributed to customers adding new scope to existing arrangements in exchange for lower prices, says Mayo. "The contracting approach is simpler if the scopes are bundled. The client doesn't have to play the integrator role, which is one of the disadvantages of the best-of-breed approach," he says. "Additionally, in some cases clients are bundling the scopes in order to attract more interest from the major service providers, and thus receive better service and lower prices overall."
Read more about outsourcing in CIO's Outsourcing Drilldown.
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