IT Outsourcing Rate Declines, Reversing 4-Year Trend

August, 2013

IT outsourcing as a percentage of the IT budget declined this year. This reverses a four-year trend and marking the first time since the start of the recession that IT organizations have begun shifting spending plans on a percentage basis toward developing internal operations and capabilities and away from outsourcing partners.

The decline is significant, down from an average 11.9% in 2012 to 10.6% in 2013, as shown in Figure 1 from our study IT Outsourcing Statistics 2013/2014.

Outsourcing Fig 1 - IT Outsourcing Rate Declines, Reversing 4-Year Trend

There is anecdotal evidence that organizations are starting to “back-source” their IT services, bringing them back in-house after a period of growth in the use of service providers. General Motors notably started this talk in fall 2012, when the company announced it would hire 10,000 technology professionals over the next three to five years and reduce its dependence on outsourcing. If other manufacturers are reconsidering their insourcing-outsourcing mix, this could have a significant impact. As this study shows, manufacturers tend to outsource at higher rates than most other sectors.

There is a more likely explanation, however. IT operating budgets are rising 2.5% this year at the median, and IT capital budgets are up 4%. With the tentative improvement in the economic outlook, IT organizations are putting newfound resources into internal operations and capital investments at a pace that is greater than their spending with IT service providers. IT outsourcing budgets are not necessarily shrinking so much as IT budgets are rising. The denominator is rising faster than the numerator.

Is this a long-term trend? Not likely. It could just signal that we are at a new phase in the recovery. In the early stages, IT organizations first turned to service providers out of reluctance to hire permanent staff. Now they are turning their attention to long-delayed infrastructure upgrades, system improvements, and unfilled positions. Some organizations may be making strategic decisions to back-source as well, if they find they have the economies of scale to efficiently deliver IT services. The growth in IT spending is currently confined mostly to large organizations, the ones that tend to do the most outsourcing, and we could just be seeing the effects of the recovery. Over the longer term, however, the strong momentum behind cloud computing means outsourcing should account for an increasing portion of the IT budget.

Here are other key findings from our IT Outsourcing Statistics 2013/2014 study:

  • Midsize companies became the leaders in outsourcing this year, spending a higher percentage of their IT budgets on outsourcing than large organizations. This is a reversal of previous years, when large organizations were spending the highest percentage of their IT budgets on outsourcing. The reason for the shift is that large organizations are also experiencing the most growth in their IT budgets. The study defines large organizations as having IT budgets of at least $20 million.
  • Application hosting has become the most frequently outsourced function, displacing application development. Application hosting also continues to be the fastest-growing outsourcing function in our study. This reflects the growing popularity and strength of software-as-a-service (SaaS). While the amount of the typical portfolio being hosted by outside parties remains low, the number of organizations outsourcing application hosting is up nearly 10% year over year, and 57% of all organizations that outsource this function are planning to increase the amount of work they outsource.
  • Organizations that outsource are favoring help desk and web/e-commerce operations as functions they are most likely to offload. On the other hand, IT security is a function that IT organizations tend to keep close to the vest. Most of the work in this area is being kept in-house.
  • The IT functions with the greatest potential for successfully reducing costs through outsourcing are desktop support and disaster recovery. The functions with the greatest potential for improving service through outsourcing are web/e-commerce operations and IT security.
  • The outsourcing of disaster recovery, web/e-commerce, data center operations, and network operations have emerged as the leaders in delivering the best value. The outsourcing of these functions can save money and improve service levels.

In the full study, we profile outsourcing activity for 11 IT functions: application development, application hosting, application maintenance, data center operations, database administration, desktop support, disaster recovery services, help desk services, IT security, network operations, and web/e-commerce systems.

For each IT function, we measure the frequency and level of outsourcing. We also look at the current plans of IT organizations to increase or decrease the amount of work they outsource. Finally, we examine the customer experience to assess whether organizations are successfully lower costs or improving service through outsourcing.

This Research Byte is a brief overview of our report on this subject, IT Outsourcing Statistics 2013/2014. 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).