Recession Accelerates Shift to IT Outsourcing

(Irvine, Calif.) A new study published by Computer Economics Inc. shows companies shifting more of their IT spending to outsourcing services, in some cases dramatically, as they grapple with staff reductions and budget cuts amid the economic downturn.

The study, IT Outsourcing Statistics 2010/2011, shows that outsourcing expenses as a percentage of total IT spending rose at the median from 3.8% in 2008 to 6.1% in 2009. From 2009 to 2010, median spending on outsourcing as a percentage of total IT spending rose again to 7.1%.

During this period many organizations put capital projects on hold, cut operating expenses, and laid off workers. The rise in outsourcing expense as a percentage of total IT spending is partly a result of a decline in total IT spending, according to John Longwell, Vice President of Research for Computer Economics, an Irvine, Calif.-based IT research and advisory firm.

“In any case, the bottom line is that IT organizations are outsourcing a greater portion of their IT functions today than just a few years ago,” Longwell said. “The recession seems to be accelerating an ongoing trend, but there are other factors. We’re seeing a sharp rise in the number of organizations outsourcing applications to SaaS vendors, for instance. Cloud computing is a development that will result in more money being spent with outside service providers, regardless of the macroeconomic climate.”

Outsourcing service providers, like many IT vendors, suffered during the recent recession as businesses reduced IT capital and operational spending. Organizations that were using outsourcing to fill in around the edges cut outsourcing services out of their budgets in favor of retaining in-house staff. Other IT organizations, however, increased the amount of work they were giving to service providers as they downsized their internal staffing levels.

Other key findings:

• The use of software-as-service and hosted applications is widespread. Applications hosting is the most frequently outsourced IT function in the study. However, the percentage of the typical portfolio being outsourced is still small, and the outsourcing cost and service success rates are low compared to other IT functions in this study.
• While SaaS/hosted applications is the most frequent form of outsourcing, it is not the most popular when measured by both frequency and level: The outsourcing of Web and e-commerce systems holds that honor.
• Outsourcing services having the most success penetrating deeper into existing accounts include SaaS/application hosting, data center operations, and application maintenance. The outsourcing trend lines are positive for these IT functions.
• The IT function with the greatest potential for reducing costs through outsourcing is desktop support. Nearly 44% of organizations that outsource this function find that they have lower costs than when they performed the function in-house.
• The outsourcing service that holds the greatest potential for improving service levels is IT security. Half of organizations that outsource IT security report that it improves service levels.

The IT Outsourcing Statistics 2010/2011 study is based on an annual survey of over 200 North American IT organizations, which Computer Economics has been conducting since 1990. The outsourcing study examines 11 IT functions that are commonly outsourced. Note that this study does not use the term outsourcing as a synonym for “offshoring” but finds most outsourcing is contracted with domestic service providers. The study is available for purchase at https://avasant.com/research/computereconomics. Free sample pages are also available.