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Financial Accounting Outsourcing (FAO) Annual Report - January 2007

IT Outsourcing in the Small and Medium Businesses

The outsourcing industry will continue to grow at a rate of 25 percent annually, reaching $100 billion in annual revenues by the year 2000. The movement toward selective sourcing will continue in 1999, with IT organizations choosing specific components to be provided by external service vendors to complement their own internal capabilities. These projections by Dean Davison, analyst, Meta Group, fall in line with those of other industry experts. Davison, however, notes that the move toward selective sourcing is creating 'an interesting dynamic' that bears watching.

The continuation of the trend toward selective sourcing, he says, creates increasing pressure on the top tier vendors who are marketing more integrated, packaged solutions and the value derived from those while facing the competition of commoditized services in each of the technology fronts.

"The people who are struggling the most to continue this balancing act are the large vendors," says Davison. "It will be fun to watch them through the process and see how they continue to redefine themselves. There will be a significant increase in things such as Internet and business process outsourcing. We also expect to see tighter integration between supply chain/customer relationship management and ERP implementation and operational services."

Davison points to other significant developments in this shifting marketplace.  He predicts increased utilization of the service bureau model - where significant infrastructure is shared across clients -- by vendors in the package applications market. He also sees commoditization of certain technology components, such as e-commerce and Internet capabilities that currently are still highly customized.

"That will fuel significant growth in those market places," he says.

Economic Impact

Growth also will be fueled by what Davison describes as "what appears to be some type of global recession." The impact of the economy has already had an impact in Asia and South America, it's effect is being felt in Europe, and those situations have implications for North America, according to Davison.

"We don't know yet how severe those economic downturns will be, but we do know they will occur," he says. "I believe there will actually be an increase in outsourcing fostered by this. There is still the common perception that outsourcing is a money saving alternative, and I believe that during 1999 a shrinking or smaller increases in their IT budgets than in previous years."

That theory, he says, is substantiated by the increases already being seen in Asia and Australia, where economic uncertainties were faced earlier than in other areas. Overall, says Davison, international growth will vary dramatically, ranging from a fairly stable marketplace in Europe to an 'exploding' market in South America, to new geographies opening in Asia.

"Singapore is really beginning to take off," he says. "1998 has been a big year in Australia, and I believe 1999 will be the same. We're beginning to see a lot of growth in South Africa and some deals in the Middle East, especially in the oil industry. I believe those areas will continue to grow rapidly. The United States and Europe are already huge markets, so they will just continue to grow at a nice healthy clip."

Major Players

In looking at the international market, Davison says Cap Gemini will continue to be a dominant player in Europe, and major international players will remain EDS, IBM and CSC. AT&T Solutions, he believes, has the potential to break into that group through acquisitions.

"We might have a few other vendors who penetrate that," he says, "but I don't think the top tier is going to change much."

Where Outsourcing is Headed...

The greatest impact of the economy, he says, will be felt among companies seeking the resources to address new technology and those dealing with the labor shortage in IT. Existing outsourcing activities will continue to grow, and he expects others to emerge. For example, he points to '10 or 15 components of help desk,' including off-hours help desk, shrink-wrap software help desk and call center capabilities. Data center growth will be dominated by bigger vendors because of the infrastructure requirements. Added to those, he says, will be increases in remote network management and desktop services.

As another indication of the changing marketplace, Davison sees a significant increase in mid-range services, as standardization of services drives a drop in prices. He also expects increased growth and sophistication in wide area networks (WAN). He agrees with other industry pundits in identifying business process outsourcing as a major new area, although he notes that some outsourcing activities are for less than the full business process.

"There is going to be a whole new suite of areas there," he says. "There is sort of a mixture of business process and technology and consultant."

On the IT Side...

On the IT side, Davison notes a trend of organizations turning to specialized outsourcing legal help. The IT vendors are dealing primarily with new and maturing technologies.

"It's just a status quo," says Davison. "Granted, the status quo is a highly dynamic, quickly changing marketplace, so that doesn't mean monotony. It just means we're going to continue to make the same rapid changes we've been making for a long time."

Publish Date: January 1999

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