What You Need to Know About IT Outsourcing Trends for 2003 | Article

IT outsourcing to the expertsWhile many bemoaned the flat budgets for corporate IT investments in 2002, don’t assume nothing has changed in the IT outsourcing (ITO) arena. Indeed, five trends are reshaping the dynamics and future of this market.

Trend #1: Provider Techniques

“The one thing that has been an absolute constant over the past year,” states Steve Sullivan, president of enterprise managed services at Getronics, “is the fact that cost-cutting measures are the first and foremost driver for existing and potential outsourcing customers.” Providers are aggressively looking for ways to take costs out of delivery of service to their customers. This activity, says Sullivan, “has never been more pronounced and is not abating whatsoever.”

Getronics is one provider moving as much work out of the field as possible – desktop services, for example – and using IT tools and methodologies to handle it remotely. Moving some services to offshore or nearshore locations is another cost-cutting technique.

Of special note is the use of self-service tools, such as giving the buyer the ability to have its users reset their own passwords. Sulllivan reports that customers are much more interested in this concept now than two years ago. It didn’t have value for buyers then because they weren’t interested in aggressively driving the behavior modifications that accompany self-service tools. But today it’s welcomed because self-service results in cost savings that can be passed back to the buyer. The concept is also growing in popularity because of Getronics’ efforts in designing interfaces that get users to an answer in three mouse clicks.

At Hewlett-Packard (HP), Jim Wardrup, director of strategic initiatives and global influencers, notes clients are also trying to reduce costs by consolidation and standardization. The successful merger, seven months ago, of conglomerates HP and Compaq Computer Corporation involved similar internal integration activities. The two companies, says Kathryn Hendricksen, director of marketing and communications of managed services at HP, “had to learn first-hand some of those hard business decisions about how to reduce IT spend and become more cost-efficient.” The merger resulted in HP being rated number one in overall performance in Information Week’s November 2002 survey of customers ranking outsourcers. Now HP shares those best practices with its clients.

As Jimmy Augustine, marketing manager, Strategic Outsourcing, IBM Global Services, states, “The depressed world economy and closer, tougher financial scrutiny are forcing a back-to-basics approach in management.” So companies are revisiting the issue of what’s core/what’s not.

HP’s Wardrup says this basic approach and cost-cutting focus has led to across-the-board activity in capturing the value of existing IT assets. “We’re finding that the majority of IT spend is now concentrated on reducing and managing the current infrastructure.

Trend #2: Provider Selection

Two notable changes in buyers’ approach to selection of outsourcing providers have occurred over the past year.

HP’s Wardrup points out that buyers are now seeking providers’ evidence of financial stability and longevity, along with expertise and experience because of the Enron and WorldCom disasters. “Companies are taking a closer look now at credibility issues and risk aversion,” he says.

The second change is buyers are looking at piecemeal deals, not wishing to put all their IT eggs in one provider’s basket. As Getronics’ Sullivan explains, “Companies are changing their thought process. There is a whole new governance process that is taking place in corporate boardrooms now, pertaining to outsourcing sums of business to a single provider.”

New laws – and corporate or association frameworks – associated with the risk issues tied to how companies buy services are leading people to take a best-of-breed approach. As Sullivan explains, “Buyers choose one provider to do the data center work, another to do application development, and a third provider for the desktop and network. Their feeling is that, by going to specialists in each area, they will get a better price than if they give all the work to one provider.”

Augustine, at IBM, predicts there will be a period of consolidation as the provider market matures over the next two years. As buyers’ decision-makers look to ensure dependability in their providers, smaller niche players are likely to merge.

Trend #3: New “Hot” Markets

The IT areas that may see a huge increase in outsourcing this year are continuity of operations, document imaging and document retention.

META Group, Inc.’s research reveals that fewer than 25 percent of Global 2000 enterprises have a comprehensive continuity of business (disaster recovery) plan in place. The September 11 wake-up call has moved data back-up operations to the top of IT budget considerations.

A key plank in this effort is the government’s new requirement for recovery operations to be strategically remote from the primary operation. Disaster recovery specialist, Wave Technologies, with six pedabytes of storage capability in one of its centers, reports that many top providers don’t have remote centers with the capacity needed for government agencies and are turning to companies like EMC and Wave. Other providers are implementing generator capacity as extra assurance for their outsourcing customers.

Brian Fowler, director of business continuity at HP, comments that the focus on business continuity has shifted dramatically since September 11. “Business continuity is not just a static plan that sits on the shelf. CxOs are telling us they have a need for agility in their business continuity plans – they need to rapidly adapt their plans to whatever change is happening internally or externally to the company. That includes people, IT, and business process changes. Business continuity must be a living process–not a dusty plan.”

Along with security, anything to do with documentation is “red hot,” says Christine Carr, a banking account executive at Getronics. Business is exploding for companies like Wave Technologies because organizations have a desperate need to store documents electronically. Regulatory requirements mandate document retention for personnel records, school records, child custody documents, banking and healthcare records. But Howard Whetzel, president of Wave Technologies, says new imaging software that enables annotations and revisions while maintaining the integrity of the original document is what’s driving this market.

Citing examples of backlogged document imaging/retention projects, Whetzel describes a company in North Carolina with one trillion documents stored from floor to ceiling in seven huge warehouses and an Oklahoma hospital currently adding more space to its facilities because one-eighth of the potential patient floor space is already filled with documents.

In contrast, Whetzel explains Wave Tech’s outsourced solution gives a client a direct feed to fully-indexed records in its database through a secure VPN, as well as a back-up CD. The solution can handle a minimum of 12,000 documents on a single CD.

The other hot IT market in 2003 is mid-sized companies. Historically underserved by outsourcing, this market is now the focus of several major providers. Antares’ CEO, Ed Hartzell, says his company believes there is a great potential for data center outsourcing in this market. State and local governments also fall into the mid-size category.

Trend #4: Buzzwords

“Managed services” is the term for outsourcing units at such companies as HP and Getronics. Hendricksen at HP states it’s a more descriptive term for what the providers are actually doing.

Buyers should also note providers’ recently coined descriptions for service offerings. IBM is using “e-business on demand,” and HP is using “adaptive infrastructure” – both describe service offerings that expand or shrink as a buyer’s business volume changes. It’s a similar concept to the pay-per-use utility model of 2001 and 2002. Both companies state there is a current trend of customers very interested in this concept of utilizing outsourcing to dial IT infrastructure up or down as needs change.

Trend #5: BTO Movement

IBM notes another trend (and new term) is buyer’s increasing interest in business transformation outsourcing (BTO). It’s a high-value initiative of strategic outsourcing, BPO (especially in finance/accounting, HR, call centers and procurement) and consulting to change the way a company does business on an enterprise-wide level. Notably, it involves both ITO and BPO – an indication of the two models becoming more integrated.

Several providers are now developing (or enhancing) differentiators within their vertical solutions to complement BTO initiatives.

As a result of the focus on BTO, HP has noticed a trend in increased benchmarking. Wardrup comments that larger companies are engaging consultants to analyze their current infrastructure, identify best-in-class providers, and specify non-core portions of the business that should be outsourced. He adds, “Because of the cost-reduction emphasis, there are a lot of people that have made claims that a particular service should be outsourced. Now there is a movement toward trying to benchmark what costs have actually been reduced and what improvement in productivity has actually occurred by doing that.”

Because of BTO offerings and buyer demands for optimal value through outsourcing, 2002 also saw an emerging trend among providers focusing more on what clients want. It’s a shift from developing capabilities and then looking for markets to sell them, to understanding what buyers want and then positioning the provider’s resources and expertise to deliver that.

IT Outsourcing Trends for 2003

  • Because of the depressed economy and buyer demands for lower prices, providers are implementing such measures as self-service tools, remote management and offshore operations to drive out costs in delivery of services to their clients.
  • Because of the Enron and Worldcom disasters, dotcom implosion and new laws, buyers are seeking providers that can demonstrate financial stability, longevity, experience and dependability.
  • Buyers are becoming interested in the concept of on-demand or adaptive infrastructure (pay-per-use) outsourcing models that scale up or down with business needs.
  • Business transformation outsourcing is driving providers to develop or enhance vertical solutions and is also driving buyers to seek benchmarking services to analyze the value components achieved through outsourcing.
  • Continuity of business initiatives, along with document imaging and retention, will be “hot” IT markets for 2003.


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