IT Outsourcing Market Trends from Giga Group
We continue to see the refinement of the evolving nature of the deals at the industry’s high end, which reveal a high degree of creativity and innovation† in some cases driven in large part by IT executives. Deals such as the J.P. Morgan award, the DuPont deal, and Textron’s network outsourcing award indicate that leading IT organizations are succeeding in structuring outsourcing deals that seek to satisfy both overall corporate and IT goals. Additionally, we’ve seen continued globalization, a broadened roster of players, and good prospects for significant deals in 1997. Other significant trends include growth in desktop and network outsourcing, which have become significant portions of overall awards, as well as the basis for significant deals in their own right (e.g., desktop deal at Citibank and network deal at Textron).
On Industry Growth
We believe the IT outsourcing market itself will grow at approximately 15% in 1997, with growth accelerating primarily in the desktop, network and applications segments. In terms of desktop, we expect to see a 19% increase. Applications outsourcing and network outsourcing will also accelerate. However, the lines between the different segments are becoming less and less meaning the division between the high-end business process players and the IT commodity suppliers, which will take further shape in 1997.
On Developments in 1997
We’ll see continued jockeying for positions of greater strength on the customer value chain. This activity will include partnering, acquisition, and strategic alliances† all geared at achieving positions of higher potential value-add in the business enterprise at correspondingly higher margins. This activity will be driven largely by ongoing margin pressures. Margin pressures on commodity segments will intensify, particularly in the data center segment (driven in part by the arrival of new players including defense-oriented suppliers) and desktop segment (driven by the increasing aggressiveness of players at the “low end” like Entex, Vanstar, and their competitors). Plus, customers are becoming more aggressive in seeking all potential cost-reducing benefits and are increasingly likely to set up deals that are, in effect, ongoing competitive bidding exercises† which is true in both the DuPont (in part) and Citibank awards in 1996. The high cost of lengthening sales cycles (with some companies turning back at the end) also contributes to it. All of these factors will continue to heap the pressure on outsourcing suppliers, with the high-margin business process-oriented work being the most likely way out. Network outsourcing (As shown with the huge success of AT&T Solutions) will also solidify this year as a service offering.
On Biggest Players
Today’s leading firms, Andersen Consulting, AT&T Solutions, Computer Sciences Corp., EDS and IBM Global Services will achieve the preponderance of play in 1997. You’ll see continuing pressure from the low-end desktop suppliers, and the networking segment will evolve significantly in 1997, with increasing activity from Concert BT/MCI and Bell Atlantic. We’re also looking for more business process experts to team with IT suppliers for BPO solutions in `97, similar in intent to what CSC is trying to do with CNA. Andersen Consulting and the “Big Five” will also play increasingly in this space, usually in tandem with IT service suppliers on the back end.
On Types of Outsourcing
We’ll see a lot more deals where various levels of service delivery and different kinds of business value are intertwined. A good example of this we believe, is Andersen’s deal with TI in which legacy migration, Year 2000 compliance, and ERP installa tion all figure prominently. The DuPont award also fits this category, in that cost considerations, as well as improved business processes and expanded business options, were clear motivations.
On Biggest Trends In 1997
We’ll see more large desktop and networking deals, more creative, multi-varied deals in which different players will be enlisted for their core competencies, and in effect, forced to work with each other–particularly at the high end of the market. We also foresee a growing emphasis on business value creation through sourcing as cost savings becomes just one of many motivations for outsourcing. By business value creation we do not necessarily mean value pricing per se, but more emphasis on achieving customer satisfaction, expanding business options, and improving core business process competencies rather than improving IT processes only. We’ve already witnessed these tendencies, I believe, in some of the most significant deals of 1996. There will also be more blurring of the lines between IT outsourcing and business process outsourcing, which will be manifested in a variety of different deals.
The growth in outsourcing has been quite significant, and this growth will continue. However, we notice an increasing sense of accountability as outsourcing becomes more of a legitimate business alternative and less of a phenomenon† less driven by dissatisfaction with IT and more by business needs. This transition is well along, but our research indicates that many customer satisfaction issues with outsourcing remain, particularly in some of the newer segments such as desktop. There is tremendous variability with regard to service provision, expectations management, and customer satisfaction. The drivers for outsourcing itself will remain in force. If anything, they will accelerate, but increasing customer sophistication will raise the bar for all suppliers.