A new year’s kickoff is a good time to review how the European economic and financial climate was influencing the evolution of senior management’s outsourcing priorities in 2010 and to benchmark the changing directions of economy in 2011, if any.
According to the Gartner’s 2010 European Outsourcing and IT Services Priorities Survey, the end of 2010 could signal the end of slow growth and a return to real economic growth — or the onset of the next financial crisis. Regardless of the future direction of the economy, European businesses and their service providers need to optimize their outsourced environments, while increasingly adopting industrialized IT services in order to reduce nondiscretionary IT spending, to better align IT to the business and to better support growth initiatives. In 2010, unlike the previous years, outsourcing became of great interest to not only large organizations, but companies of all sizes, from SMEs to startups, and IT budgets of various magnitudes. For example, 14.7% of organizations with IT budgets of less than €1 million expressed interest in outsourcing, which compares with only 6.1% of organizations in this category in 2009. While conducting its Pan-European IT outsourcing study 2010, IT Sourcing Europe surveyed 1,557 companies with any type of IT outsourcing experience and was surprised to find that 86% of these companies were small to mid-sized (i.e. 1 to 500 in headcount and with IT budgets far less than €1 million).
In 2010 the pressure on capital and IT operating expenditure was still strong, and organizations expected providers to deliver further cost reductions. Although 53% said that they would outsource more and 40% said they would increase the external share of their budget, only 24% said that they would increase the budget for providers, according to Gartner. Almost a quarter of organizations expected their IT services budget to continue to decrease, while only 9.5% believed they would reduce their external IT services spending by 2011.
In 2010 European organizations increasingly focused on comparing external and internal service offerings. Gartner’s survey results say that the percentage of organizations spending 25% to 50% of their IT budget on external service providers was almost stable in 1Q 2010 – 26.2%. The number of organizations outsourcing less than 25% was down by two percentage points (from 45.9% to 43.9%), while there was an increase in organizations spending more than 50% of their IT budget externally (up to 29.8%). Regarding the volume of the outsourced software development, IT Sourcing Europe’s survey findings show that 57.2% of Western European IT services buyers outsourced less than 60% of their entire software development function, while only 19% outsourced 90% to 100% of their software development. This finding demonstrates that in 2010 companies were still afraid of transferring their software development in its entirety (i.e. core end-to-end development) to the 3d party.
While cost cutting was CEOs’ first priority in 2009, it became CEOs’ fifth priority in 2010, Gartner says. In 2010, the top priorities were customer retention/attraction, competitiveness and attracting/retaining talent. As per IT Sourcing Europe’s survey, the top three outsourcing priorities in 2010 were cost reduction, time-to-market acceleration and access to qualified IT resources/skills that are hard to find within homelands. As seen from these findings, cost pressures continued unabated in 2010, while requirements for access to resources and capabilities, flexibility and scalability increased. This means that 2011 is bringing sourcing strategists in Europe a more complex set of business requirements that are not easy to address.
To conclude with, in 2011 service providers will need to compete against increased competition from services based on alternative delivery models (e.g., own / virtual software teams, services consolidation etc) and from niche and potentially disruptive players in order to address client organizations’ changing priorities and requirements. To do so, providers must focus delivery toward clients’ mature outsourcing requirements (governance, intimate relationship and customized service, quality of services, responsiveness and innovation) and their new industrialized service requirements of high flexibility and good quality at a low price.
(Sources: Gartner’s ‘Survey Analysis of Outsourcing and IT Services Priorities, Europe, 2010’; IT Sourcing Europe’s ‘European IT Outsourcing Intelligence Report 2010: Western and Northern Europe’)