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IT Forecast: Look for Growth, Changing Deal Types, and a More Global Delivery Model

Here’s good news for the IT outsourcing (ITO) world: the market will grow in 2005. “We see the outsourcing sector as a growth market,” says Don Richards, Managing Partner for Application Outsourcing at Accenture.

Joe Hogan, Worldwide VP of Marketing for HP Managed Services group, says this year buyers “can’t afford to handle their IT in a static fashion.” Since the beginning of the economic downturn in 2000, many companies have postponed making investments in their infrastructure because of the economy. “Today there are innovations they need to be taken advantage of to stay competitive in the global marketplace,” he posits. That augurs well for the growth of IT outsourcing this year.

For example, Marilyn Nelson, Practice Director for Network and Desktop Outsourcing Solutions for Getronics, says “there are still a lot of unrefreshed PCs in the marketplace” because companies have been unwilling to spend the dollars to do this. This year she believes companies will focus on updating their PCs and will outsource to get the job done.

IDC expected companies and governments to spent $553 billion on external IT services in 2004, according to a November 2004 report entitled “Worldwide Services 2004-2008 Forecast Update.” The research company predicted worldwide IT services would grow at a 6.9 percent compound annual growth rate over the next five years.

2005 will be the year of more activity in the IT marketplace, predicts Mike Jones, President and CEO, (i)Structure. That’s because CIOs today are under great pressure to justify their expenditures. Today “a one time, 10 percent cut from a CIO’s budget won’t keep them employed,” says Michael Whitacre, Sales Leader for Acxiom. Instead, their CEO and CFO expect them “to do that every year.”

The IDC report predicts further price declines for commoditized skills in the application management services and development markets. The emergence of on demand services in outsourcing contracts will also add price pressures at renegotiation time.

How IT Deals Will Change in 2005

Mark King, President of ACS, says buyers today “would rather outsource transactions with an immediate return on investment and little to no up-front cash investment.” He says they no longer desire ERP-type deals.

Richards says buyers, who now have ITO experience under their belts, “have become savvier.” Now they want to create relationships “that are more flexible and adaptable to meet the changing needs of their businesses than contracts of the past,” he reports. They no longer want to lock in “what is perfect for their business today. They don’t want to lock down every detail.” Instead, buyers want to focus on long-term business objectives and build enough flexibility into the relationship to be able to take 180-degree turns when necessary. “This is a current trend we are seeing with many of our global clients,” says the Accenture executive.

Nelson adds that contract terms will grow shorter this year; she predicts three years will be the longest a buyer will agree to. Buyers will only talk about a five-year agreement “if they are confident in the stability of the IT supplier,” she says.

In 2005, mobility will become a more significant factor in infrastructure outsourcing, says Phil Smith, Vice President, Solutions Marketing for Unisys Global Infrastructure Services. “Usually we think of computers and networks when we think of IT infrastructure. But now, people also use mobile devices to deliver strategic applications. Mobile devices are another part of the IT infrastructure that companies need to manage and secure,” he adds.

Patty Rosewater, Director of Strategy and Planning for HP Managed Services group, says this year IT buyers will consolidate their service providers, turning for help to just two or three key suppliers. “I predict we will see a decreasing number of suppliers with increasing deal size, but fewer ‘one vendor takes all’ deals,” she says.

The Integration of BPO and IT Picks Up Steam

Today’s IT buyers want their suppliers “to solve their business problems,” according to Whitacre. That means suppliers “have to have a deep understanding of their businesses” in the sales stage. That means they can no longer be all things to all industry verticals. The Acxiom executive predicts suppliers will become experts in specific industry verticals to be able to effectively compete. “We’ll see some stratification along industries in 2005,” he predicts.

Rosewater says this is the year that the “Holy Grail” of integration will become the norm–buyers will outsource the process, the application, and the infrastructure in one outsourcing. This makes sense for buyers because the software–ERP, human resources, finance, etc.–is “so highly integrated within the business process,” she explains.

King says in 2004 20 percent of his company’s BPO deals contained an IT component. He expects that number to increase this year because the bundled route “lowers the cost of delivery” to buyers. “Single source, global providers of IT and BPO services will have a distinct advantage in 2005,” he predicts.

In addition to lower cost, the ITO/BPO marriage is the surest route to business transformation, says Alfred Binford, Vice President and General Manager of Unisys Global Outsourcing business for the Americas. “The link between the two will become more powerful this year because it’s the best way to transform an enterprise,” he says. “This level of change will prompt organizations to connect business strategies with every operational level, including their business processes, applications, and IT infrastructure.”

Hogan says the integration of business processes with IT now requires a different kind of service level agreement (SLA). Now SLAs reflect the needs of the business process and not just system requirements. For example, in an accounts payable outsourcing relationship, an SLA metric would cover if the checks were cut on time, not how long the system was up and running.

According to Whitacre, the integration of IT and BPO is producing the biggest risk in 2005 for IT buyers: “structuring a deal under the old IT outsourcing paradigm.” Buyers who stick with the old norm run the risk of “pigeon holing themselves into a static situation from which they can’t escape.”

Instead of following the classic Request for Proposal (RFP) process, Whitacre proposes asking the suppliers or the buyer’s outsourcing consultants to come up with solutions to the business problems first, then structure the engagements around that solution.

What’s New with ASPs

Application service providers (ASP) are continuing to evolve. Jones says companies that have their own intellectual property will share it with the marketplace as an ASP; is an example. That company had a very successful public offering last summer. “We’ll see that trend continue this year,” Jones believes.

Remote management is a growing trend. Late last year PeopleSoft launched a new application management service to allow customers to outsource their PeopleSoft applications. PeopleSoft began hosting its software in 2000. Steve Earl, Director of Hosting Strategy, PeopleSoft Global Services, says this trend developed because corporations have made the investment in their systems, networks, and data centers and want to keep the infrastructure at their own locations. “But they have knowledge gaps in running the software and don’t want to augment their staffs. So they asked us to handle their end-to-end needs or just do specific tasks,” he explains.

The Impact of Sarbanes-Oxley

Jones predicts this year “a lot more small and medium-sized companies” will outsource their server environments to get “more robust disaster recovery capabilities.” The Sarbanes-Oxley Act is forcing them to worry about disaster recovery. “They can’t afford the business impact of a single point of failure,” he says.

Although disaster recovery was always important, Jones says many smaller companies had to pass because of the cost; they couldn’t afford any over-capacity in their server world. “No one wanted an idle UNIX server sitting there just waiting for another server to go down,” he says. Windows NT users have more affordable options “but recovering data is a project,” Jones reports, because the equipment needed to bring up the lost data has to be an exact replica of the equipment that failed.

Outsourcing solves the problem because the buyer doesn’t have to allocate extra resources; the outsourcer can provide them at a fraction of the cost.

Earl says PeopleSoft customers signing up for its new service “want PeopleSoft to take accountability for the software. They want more granularity.” He says the Sarbanes-Oxley Act and the need for SAS 70 internal audits are driving this trend for companies to outsource the remote management of their software to the people who wrote it and know it best.

Offshoring: The Impact of Global Sourcing

Richards says this year buyers want “a more balanced delivery model.” He says “the irrational exuberance of offshoring has passed. People are over the mania and now are focusing on the fundamentals.” In his opinion, offshoring is now just one of the delivery elements. He says Accenture’s buyers, the Global 1000, are focusing on a broader value proposition and “it is not just about cost.” Buyers are “most interested in understanding how outsourcing can add value to their core business,” he reports.

This year he says buyers understand what portion of the applications, development, and maintenance (ADM) work can go off-site and what has to remain at home. “US buyers generally expect some portion of this work to go off-site,” Richards continues. “But there are portions of the work that must be done on-site.” He cites ADM work centering on vital business priorities and innovative ideas as work that requires daily face-to-face interaction. “This work has to be done where the business is,” he says.

Richards says he expects this year buyers will demand “more global coverage” for their ADM work. While India remains a major sourcing location for Accenture, he says buyers have business reasons for not sending all their work to India. Accenture’s buyers want to use other Asian locations and more near shore options–Latin American and Canada for US buyers and eastern Europe for western European buyers.

Business continuity is one reason; buyers don’t want to shoulder the risk of having all their business in one place. Proximity is another consideration. “If you need to have a face-to-face meeting in the US, it’s a long trip to come from India. It’s easier to travel from Latin America,” he says. Time zones are another reason near shore locations are appealing. Richards says attrition rates can go up when the supplier requires its employees to work night shifts.

Jimmy Harris, COO, Technology Infrastructure Services at Accenture, says “there is a continuing demand” to see how much of the infrastructure management process can be handled by global sourcing locations. That includes systems administration, database management, operations (the actual monitoring of IT services), network management, and desktop functions. “Buyers want the scale outsourcing can bring to these commodity services plus they want to take advantage of the coverage, flexibility, and cost advantage of global resources,” he reports.

He says this move to global delivery “will become more pronounced this year” because buyers are becoming more comfortable with the idea that it really can work.

New Technologies: VoIP and Grid Computing

Harris says buyers are interested in new technologies like voice over Internet protocol (VoIP) and multiprotocol label switching (MPLS) because they “reduce cost through technology.” Both reduce devices in the network; this reduction allows outsourcers to offer better services cheaper.

Whitacre says 2005 is the year for the application of grid computing, which links PCs together to replace the more expensive mainframe and large SMP (Symmetric Multi-Processing) box processing. Grid computing “truly enables business transformation outsourcing from a processing standpoint” because “it produces economic and performance benefits that far exceed those available from classic utility outsourcing engagements.”

Radio frequency ID (RFID) and open source code are also changing ITO. The Outsourcing Journal will examine these four technologies in greater detail in a series starting in April.

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