Study: Most companies will outsource IT by 2005

Almost all North American IT departments will outsource at least one essential technology operation by 2005, which indicates that IT executives in the region must know how to choose an outsourcer, structure contracts and manage the relationships, according to a new Meta Group Inc. study.

The study also contains a warning for outsourcers: Past performance and market reputation weigh heavily on the minds of IT executives when deciding which outsourcing provider to choose. “Vendor evaluations are often based on the ‘comfort level’ of executives with vendor reputation and proven performance. It is extremely difficult for a vendor to overcome negative market perception,” the study reads.

Currently, more than 70 per cent of North American IT departments outsource between 10 per cent and 50 per cent of their IT operations, the study says. Meanwhile, spending on IT outsourcing in North America is growing at about 18 per cent annually, as IT departments increasingly shift money that would have been used for internal operations to outsourcers, the study said. The goals of IT departments in outsourcing are to gain business agility, become more efficient and reduce support costs.

“Spending for IT outsourcing displaces internal core spending and is rarely discretionary,” according to the study, which found that Spending on outsourcing is growing at a 20 per cent annual rate worldwide.

In terms of trends, in 2003 and 2004 outsourcing engagements will be primarily focused on managing applications. Later, in 2006 and 2007, the focus will shift to industry-specific offerings, by which time “nearly all technology products – hardware, software, etc…will be delivered through ‘service’ models.”

Using 15 different criteria to evaluate “full service” IT outsourcers serving North America, including strategy, geographic coverage, reputation, services portfolio, technology, pricing and execution, Meta Group ranked IBM Corp.’s Global Services unit as the overall leader, followed by Electronic Data Systems Corp.

Meta Group named eight other outsourcers as “challengers,” the ranking below “leader.” These were Computer Sciences Corp., Hewlett-Packard Co., Science Applications International Corp., Unisys Corp., Affiliated Computer Services Inc., Perot Systems Corp., CGI Group Inc. and Siemens AG’s Siemens Business Services Inc. Finally, Cap Gemini Ernst & Young ranked as a “follower,” the category after “challenger.”

However, all eleven providers evaluated by Meta Group exhibited a high degree of performance, provide a full range of IT services, and all are able to meet the operational requirements of most IT organizations, according to the study. Combined, these 11 providers generated 75 per cent of the world’s US$120 billion in outsourcing revenue in 2001, according to Meta Group, based in Stamford, Conn.

The study only included vendors able to provide a full palette of services in North America, leaving out dozens of providers that offer fewer services or are focused on specific niches. These smaller providers, however, can be good choices for certain outsourcing projects, according to the study.