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IT Outsourcing Year in Review: Grading Our Predictions

By Stephanie Overby, CIO
December 14, 2012 04:34 PM ET

CIO - Last year at this time, CIO.com and its outsourcing experts made some bold predictions for IT services in 2012. This would be the year all the cloud computing hype would finally blow over. Application development would migrate from offshore to second-tier cities stateside. And IT service providers would give sales-incentivized account managers the boot in favor of a more relationship-oriented approach.

None of those particular prognostications came to pass, of course. In reviewing last year's prophecies, one third of them were just wishful thinking. Almost half turned up in fits and starts. It seems 2012 was more about evolution than revolution in the IT outsourcing market. And a quarter of them were dead on.

As we pull together our 2013 forecast, here's how we rated those 2012 predictions:

Right On Target

2012 Will Be a Mixed Bag of M&A Activity

As predicted, there were no earth-shattering mega-deals in the IT services space. "Service providers gobbled up a few smaller service providers, but the valuations have driven them to acquire capability through better deal making with buyers," says Tony Filippone, executive vice president of research for outsourcing analyst firm HfS Research. HP's previous acquisitions of Autonomy and EDS made headlines throughout the year--for all the wrong reasons. "With HP's financial issues, one has to wonder if [CEO] Meg [Whitman] is going to sell," says Mark Ruckman, outsourcing consultant with Sanda Partners.

[ Related: More on Mergers & Acquisition ]

"By comparison, in 2012 IBM acquired at least eight mid-sized companies that provide various types of domain expertise that IBM likely will use throughout the enterprise-not just in the services division," says Bob Zahler, a partner in law firm Pillsbury's global sourcing group.

[ Related: IBM Closes $1.3B Kenexa Acquisition ]

IT Service Buyers Look Beyond Labor Arbitrage (But Vendors Don't)

Indeed, outsourcing customers began placing more of a premium on business outcomes than incremental cost savings while many service providers outcome-based contracting talk was simply that. "They too often fell back on replicating the same activities and service while using lower cost labor as the fundamental value proposition," says David Rutchik, partner with outsourcing consultancy Pace Harmon.

"However," adds Zahler, "this is not because they are misreading client objectives, but because for the most part outsourcing providers have not been able to deliver any meaningful process improvement and innovation."

Some outsourcers did begin offering more flexible terms, says Filippone of HfS Research. "And maybe this is all that buyers really wanted in the first place."

Global Companies Seek Global Support Beyond India

Dispersing the outsourcing portfolio among several geographies is now considered a best practice, whether to reduce geopolitical risk, access new skills or diversity operations. "India no longer is the low-cost location for certain types of services," says Zahler of Pillsbury. "Almost every presentation from a global outsourcing service provider begins with a slide or two identifying their numerous offshore facilities located around the world and the substantial telecommunications network they have developed tying all these delivery centers together in some 'seamless' fashion."

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