IT Outsourcing Spend: Slow and Steady for 2014

Experts agree that 2014 will not be a banner year for outsourcing spending. Sources as diverse as the Wall Street Journal, KPMG, PC Week, Gartner, Forrester and others all predict a modest year for outsourcing. Yet, experience shows that outsourcing spend varies widely by region and according to capacity needs. IT shops are struggling to keep up with Agile development resources, lower cost service delivery, mobile computing and social media talent – all of which have the potential to bring outsourcing business to the table.

ITO Will Pick Up in 2015

Andrew Bartels, Forrester Research’s vice president and principal analyst serving CIOs, was quoted in CIO article Global IT Spending Outlook ‘better but Subpar’ for 2014, Forrester Says on January 2, 2014, on the subject of IT spending overall. In the case of IT outsourcing, Forrester research indicates that “although IT outsourcing will be one of the weaker segments next year [2014], it will pick up in 2015…” He goes on to explain that, “The shift from weaker to better growth is partly because we [Forrester] are including infrastructure-as-a-service in this category, but mostly because the weak economy of 2013 gave a lift to new outsourcing deals, whose impact on spending will show up in 2015.”

IT outsourcing, whether nearshore or offshore, is big business. Gartner predicted, as noted in the company’s press release, on July 17, 2013 that the IT outsourcing market worldwide would “reach $288 billion in 2013, a 2.8 percent increase in U.S. dollars (and 5.1 percent in constant currency*) from 2012.” Further, Gartner ascertains that currency-related factors were slowing the pace of growth in mature regions such as Western Europe and Asia-Pacific overall. Yet, it was more optimistic when it came to growth areas suggesting that “ITO markets in emerging Asia/Pacific, Latin America and Greater China will all grow more than 13 percent in 2013 and 2014. Expansion by multinationals into these regions, new buyers of ITO that are themselves growing organizations, and fertile economic conditions all drive the positive outlook.”

Need for Capital

The fact remains that CIOs need resources that are not always available or affordable in local areas. Budget allocation is often driven by IT’s changing role in the enterprise. Disruptive technologies are driving IT outsourcing spend to “accelerate capabilities such as mobility and the cloud, and to fund new roles,” as reported in the Wall Street Journal article Transformational Change in IT Will Drive 2014 Spending by Andrew Horne, managing director of the CEB CIO Leadership Council, on January 4, 2014. So, while “spending plans for other types of external provision, such as outsourcing, are flat,” there are pockets of spending that will continue to grow regionally as well as functionally as technology evolves and skill availability remains scarce.

CIO plans and requirements are tracked every year by Harvey Nash; providing a voice of a diverse range of CIOs active in corporations. In its annual survey, Harvey Nash 2013 CIO Survey, insight is highlighted for both IT spend overall as well as outsourcing plans of CIOs. The report indicates that the “…overall health of IT budgets in 2013 to 2014 remains modest and CIOs remain cautious with their budget expectations.” Where do CIOs see outsourcing in the context of the larger IT spend equation? Research results show that “one in ten CIOs spend more than half of their IT budget on outsourced activity, while 19 per cent of CIOs commit between a quarter and a half of their IT spend on outsourcing projects.” Figure 1 shows CIO plans for future spending on IT outsourcing.

Equally interesting in the Nash study is its characterization of what types of functions are being outsourced. As shown in Figure 2, “almost two-thirds of CIOs outsource their software application development, including mobile applications, while over half (54 per cent) outsource their data centers. Just under half of CIOs continue to outsource the maintenance and ongoing support of the applications they develop. A third have handed over the management of their service desk / help desk to outsourced partners, while four per cent of CIOs have outsourced the whole IT department.”

The percentage of IT budget that outsourcing represents combined with the types of IT disciplines being outsourced provide evidence that IT outsourcing remains alive and well. As the Nash survey stated, “not all technology skills are equal in the current market. CIOs reporting skills shortages in mobile have grown by eleven per cent this year, with a quarter of all CIOs struggling to find the right mobile talent. In addition, 25 per cent of CIOs cite skills shortages in big data, and 19 per cent for social media technology skills, up eight per cent on last year. However, despite the shift towards ‘21st century’ talent, it is the ‘classic’ technology skills of business analysis (sought by 39 per cent of CIOs), enterprise / technical architecture (39 per cent) and project management (31 per cent) that remain the skills most in demand overall.”

ITO in Latin America

Where does Latin America fit in the competitive landscape for outsourcing IT? According to a February 9, 2014, Forbes article How to Find the Worlds Best Talent: Offshore by Greg Satell, outsourcing is essential to gain access to diverse and much-needed talent pools. Citing Toptal CEO Taso Du Val, who is bullish on Latin America, Satell states that “due to the similarities of time zones, many US firms favor Latin America for outsourcing.  Du Val is especially impressed with what’s available in Brazil, where he says you can find some of the best Ruby on Rails programmers in the world. However, you pay for quality and in Brazil top developers demand $5000-$10,000 a month.”

This is promising news for the Latin American region, even during a year where budget increases are modest. Continued talent development and the range of opportunities available lend itself to an environment where technology services can be incubated, supported by a broader interest and need for sourcing options for both United States and global enterprises.