Outsourcing spending to increase by 2005: study

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

Overall, the survey respondents said they do not expect to spend more on IT this year and next; 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 one area that will see the steepest decline in spending is the applications sector, which will see a projected 13 per cent decline.

At the same time, she said, the percentage of money spent on IT outsourcing will actually increase by five per cent over the same period. “What this is telling us, in terms of the competitive environment, 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.” Vendors who have a play in the services space will have to work at holding onto existing clients, she added.

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. There are a lot of companies…that will have a vested interest in taking good care of (customers) to retain or acquire that relationship.”

As part of the study, Ipsos-Reid also looked at outsourcing migration patterns of the respondents, asking them 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 biggest decline, in terms of outsourcing priority, was in the application management and development space, which the study predicted would see a 30 per cent decline by 2005. “The (application development and management) market is starting to…show signs of maturity, and growth…is starting to slow down,” Dellazizzo said.

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,” she explained. “Fewer net new contracts are likely to be entering market. We have not conclusively demonstrated this, but there is a tendency toward the possibility of larger IT-type contracts as opposed to selective application outsourcing contracts.”

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,” Dellazizzo said, referring to recent bad press offshore outsourcing has been receiving, and how it has become an election issue in the U.S.

Thirty-two per cent 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 saying the key reason to offshore would be to lower costs. 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.”

Chris Corey, vice-president of Borland Corp. and general manager of Borland Canada (one of the study’s co-sponsors), said the feedback Borland has been receiving from customers “pretty well matches very closely what the study says. There is a reluctance (to offshore outsource) but customers are primarily looking for ways to improve productivity and reduce costs.”

He agreed that fears of Canadian job loss are a component of that reluctance, but added that another primary reason is risk. “People feel that unless they have a high degree of formality to support the offshore model, the risk to cost ratio is disproportionate.”

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 — 305 senior IT managers and 298 business executives — in enterprises across Canada took part in the study, which over a three-year period focused on spending and outsourcing in four sectors of IT: applications, services, security, and hardware and infrastructure.

Other findings included:

– Business process outsourcing (BPO) is on the rise: 20 per cent of respondents currently outsource and 28 per cent plan to use BPO within the next 18 months. Adoption trends indicate a migration towards increased adoption in the large business segment in 2005 and a decline of net new BPO happening in the small business segment within the next 18 months.

– Web hosting outsourcing as a priority is declining: in 2003 52 per cent of respondents said they were outsourcing this area, but in the next 12 to 18 months, that will drop to 15 per cent.

– The lack of process and systems integration expertise surfaced as the leading inhibitor when integrating new technology with existing IT. A total of 43 per cent of respondents indicated this was a major challenge.

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

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