Service Providers Get Bigger Share of IT Budget

IT organizations are shifting more of the IT spending to outsourcing services 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 a 3.8% in 2008 to 6.1% in 2009, as shown in Figure 1. 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. As such, the rise in outsourcing expenses as a percentage of total IT spending is partly a result of a decline in total IT spending. The net result, however, is that IT organizations are outsourcing a greater portion of their IT functions today than just a few years ago.

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 amount 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 full study measures the frequency and level of outsourcing activity for 11 commonly outsourced IT functions, and reports the percentage of IT organizations that have successfully reduce costs and improve service levels by outsourcing each of the IT functions. The study also reports the frequency and level of offshore outsourcing of each of the functions and on outsourcing as a percentage of total IT spending by organization size.

This Research Byte is a brief overview of our report on this subject, IT Outsourcing Statistics 2010-2011. The full report is available at no charge for Computer Economics clients, or it may be purchased by non-clients directly from our website (click for pricing).