Growth of IT Outsourcing: No End in Sight

August, 2006

According to our recently published report on IT Outsourcing Trends, IT outsourcing has become pervasive in North American companies. Furthermore, our IT outsourcing statistics indicate no signs of a slowdown in the use of outside service providers, with plans to outsource IT functions increasing in every one of the eight major categories and 10 industries studied.

As shown in Figure 1, the eight major categories of IT outsourcing are: data center operations outsourcing, desktop support outsourcing, help desk outsourcing, software development outsourcing, website/e-commerce outsourcing, hosted applications (software as a service), network operations outsourcing, and disaster recovery services outsourcing. The full report provides these outsourcing metrics by size of organization and industry sector.

Growth Fig1 - Growth of IT Outsourcing: No End in Sight

As shown in Figure 1, the outsourcing statistics found that the most popular type of outsourcing is software development, followed closely by outsourcing of website/e-commerce, hosted applications, and outsourcing of disaster recovery services. These categories are outsourced—either in whole or in part—by over half of the organizations in the study. The remaining categories—network operations, desktop support, data center operations, and help desk—are outsourced in whole or in part by less than half of organizations.

However, the level of outsourcing today does not tell the whole story. Figure 1 shows that in every category there are far more organizations increasing their use of outsourcing than decreasing (or, “back-sourcing”). For example, software development, the most popular category of outsourcing, is also the category that is growing the most.

Although website/e-commerce is the second most popular form of outsourcing, it is increasing in a smaller percentage of organizations. This indicates that website/e-commerce outsourcing is a mature form of outsourcing and is not growing as quickly as other categories.

Hosted applications, on the other hand, follow closely behind website/e-commerce outsourcing, but they are growing in use in a higher percentage of the organizations surveyed. This indicates that this form of outsourcing, sometimes known as software as a service or software on-demand, is still in its early stages of adoption.

The three categories of outsourcing with the lowest level of adoption are desktop support, data center operations, and help desk outsourcing. Even though these categories are the least popular, they still show a positive growth trend, with a greater number of organizations increasing their use of outsourcing than back-sourcing. Furthermore, the level of back-sourcing in these categories is low, indicating a relatively high level of satisfaction with this type of outsourcing.

The trends in outsourcing for data center operations is of particular interest. Data center outsourcing is the category that many IT professionals think of when outsourcing is mentioned. But as shown, only 32% of organizations practice some form of data center operations outsourcing. Furthermore, its level of growth, although positive, is the lowest of any of the eight categories in our study. This may indicate a slowing of the increase in data center outsourcing and a possible flattening of the level of outsourcing in this category in the coming years.

Concerning offshoring statistics, the full report found that nearly one-fifth of all organizations are currently using offshore service providers (outside of the U.S. and Canada), with the use of offshoring increasing substantially as organization size increases.

August 2006

The full report on IT outsourcing trends may be found in Chapter 5 of our IT Spending, Staffing, and Technology Trends 2006/2007 study. The full report provides more detailed analysis of outsourcing trends in each of the eight categories, including a breakdown of trends by organization size and for 10 industry sectors.

Industry sectors include banking/finance, insurance, discrete manufacturing, process manufacturing, healthcare, retail, wholesale distribution, utilities and energy, business services, and government.

The chapter on IT outsourcing trends may be purchased at this link: (click for pricing).

A desciption of our entire IT Spending, Staffing, and Technology trends study, of which this chapter on IT outsourcing is a part, may be found in the full study description.