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Smaller, shorter-term deals shake up IT outsourcing industry

Stephanie Overby | Feb. 10, 2014
It's not just cheaper prices pushing down IT outsourcing contract values. The 'new normal' for outsourcing presents risks and opportunities for customers and IT service providers.

IT Service Providers Turn to Automation
Nonetheless with overall contract revenues decreasing, IT service providers will look to automation and as-a-service solutions to drive down their operational costs and increase their profit margins, according to ISG. And outsourcing clients seem OK with that.

"Clients have realized that outsourcing hasn't brought the promised cost savings, and they're also realizing that they themselves might be part of the problem," Rudy says. "Labor arbitrage can only get you so far, and clients are coming to understand that to realize significant savings you have to attack the processes and inefficiencies in service delivery."

Customized solutions are decreasing, with clients more willing to adjust their processes to the service providers' standards rather than the other way around. "This allows the provider to deliver services more efficiently, thereby resulting in a win/win: lower prices for the client, higher margins for the provider," Rudy says.

But that will require customers to manage the operational risk that comes with more standard solutions. "With point solutions, the onus of integrating these services and ensuring closure of any gaps in level of service will now be the responsibility of the client," says Coatney.

"In order to successfully plug in and integrate point solutions, clients must have a strong view of the architecture and portfolio of services they have in place to meet business needs," Coatney says. "It's becoming imperative to have the flexibility to scale these standard solutions so that they can respond to evolving business requirements."

Manufacturing IT Services
And as IT services become more homogenous, providers will need to implement a "factory-like" approach to service delivery in order to efficiently attract higher volumes of smaller opportunities, says Rudy.

At the same time, suppliers will have to find new ways to differentiate themselves in a crowded marketplace, such as industry-specific offerings and value-added services that solve business problems. "They also need to demonstrate success and credibility in new and innovative technologies," says Rudy. "Clients want the latest tools and technology but they don't want to be guinea pigs."

The upside of the evolving IT outsourcing market is that an increasing percentage of the IT budget will shift from utility services to value-added, industry-specific solutions, says Hall.

"IT is able to start focusing on value-added services and integrating solutions to drive higher business value," Hall says. "This provides an opportunity for providers to place larger bets on social, mobile, analytics, cloud, and business-process-as-a-service solutions that will continue to drive efficiency but also enable higher value projects such as mobility and analytics."


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