Firms split on outsourcing development

A study released earlier this month by research firm Ipsos-Reid Corp. predicts that the number of companies that outsource key services in 2003 will decrease in 2005, but that the percentage of spending allocated to outsourcing will increase over this period.

Overall, respondents said they do not expect to spend more on IT this year; in fact, they plan to spend less.

“From 2003 to 2005, the money companies are planning to spend on IT will drop of 4.4 per cent overall,” said Lise Dellazizzo, vice-president, information technology and communications for Ipsos-Reid in Toronto, adding that the steepest decline in spending will be seen in the applications sector — a projected 13 per cent drop.

At the same time, the survey found the percentage of money spent on IT outsourcing will actually increase by five per cent over the same period.

“What this is telling us…is that it will become more competitive for service providers and vendors. There is no large influx of money coming into market, but more of (the spending) will be diverted and funneled into outsourcing services,” Dellazizzo added.

Vendors who have a play in the services space will have to work at holding onto existing clients. This is good news for customers, Dellazizzo said. “For buyers, they will find that it is a buyer’s market very much right now. They should be looking for excellent service and if they are not happy with their service provider, they should look around and become more educated.”

Ipsos-Reid also asked respondents what they are outsourcing now, what they plan to outsource in 12 months and what they expect to hand off to service providers in 18 months.

The study predicted the application management and development would see a 30 per cent decline by 2005. At the same time, spending on application management and development outsourcing is expected to go up six per cent.

“Companies are likely to go deeper, spending more money on application outsourcing, but fewer companies are planning to outsource,” which means “fewer but bigger contracts,” Dellazizzo explained.

The study also zeroed in on another trend: Canadian companies are reluctant to outsource business processes offshore. Eighty-eight per cent of survey respondents said they were not willing to outsource globally. “We feel the reason that is so pronounced is because it is a backlash as a result of the economic and political climate,” she said, referring to recent bad press offshore outsourcing has been receiving, and how it has become an election issue in the U.S.

The mixed views toward outsourcing come as no surprise to Phil Adie. “People forget that Canada has been the leading nearshore centre for the U.S. economy for years,” the managing director of TLI Software Pvt. Ltd. said. “Most successful Canadian companies market a majority of their services south of the border, or are actually an insourcing centre for a U.S. parent.”

Adie said any concern regarding app dev outsourcing is too late. “Canadians buy most of their core software from U.S. based vendors,” he said. “In reality the development of software has already transitioned to a global model.”

Despite the focus on outsourcing development work, nearly a third of respondents cited the desire to retain software development jobs in Canada as the top reason why they don’t want to send work offshore. In addition, 33 per cent said they would rather retain the management and control of IT than hand it off, Dellazizzo said.

Cost was still the biggest driver to outsource globally, with 54 per cent of respondents citing it as the key reason. However, “on the flip-side of this, in general Canadian companies still don’t see the cost benefit of outsourcing. Thirty-seven per cent of those companies that answered that they would not (offshore) outsource were concerned about the cost of doing it. They haven’t gotten the message; they haven’t seen the value or benefit of outsourcing.”

According to Dellazizzo, companies interested in offshore outsourcing “should not hesitate to ask the service provider as many questions as they wish: how much will be done in Canada? Is any of this done in the U.S.? Will any of the work be sent globally? What are the guarantees?….They may find that the security measures put into place, training, all those things, are enough for them to feel comfortable” about offshoring.

The Ipsos-Reid study included 603 decision makers — half senior IT managers and half business executives — in enterprises across Canada, which over a three-year period focused on spending and outsourcing in four sectors of IT: applications, services, security, and hardware and infrastructure.

The standard margin of error for 603 surveys at a 95 per cent level of confidence is 3.99 per cent.

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