Outsourcing opportunities to shift in the New Year as budgets increase

A year ago, the IT industry – like most industries – was in turmoil. Economic conditions had forced most companies to cut IT spending to the bone. Staff cuts were widespread. Strategic projects were abandoned in favor of cost-cutting initiatives. Assumptions about the future of the business were reversed; IT changed its objectives from innovation and growth to cost management and asset reallocation.

As the industry begins a new year, the picture looks significantly less dire. While few IT departments are planning the wild expansion rates of 1999 or 2000, many organizations are cautiously rolling out plans for new projects, new innovations, and even new staff. IT growth may be slow in 2004, but it is not out of the question, as it was at the outset of 2003.

What does this apparent recovery mean for IT outsourcing? In simplest terms, it means that enterprises this year will look to outsourcing providers more for growth, and less for survival.

In 2003, many companies contracted with outsourcing providers as a means of cutting costs and minimizing overhead. They replaced expensive internal staff members with lower-cost services from third parties, which offered economies of scale and could be hired on a pay-as-you-go basis. Many of the major systems integrators found themselves not only advising and organizing projects for their clients, but doing the work as well.

While systems integrators were expanding their outsourcing businesses during 2003, the market for traditional consultative work fell precipitously. Most enterprises were not starting new projects or doing major restructuring of their IT environments. Enterprises weren’t doing anything new, so their need for consulting was minimal.

In 2004, most outsourcing providers should see greater balance between full outsourcing (“brawn”) opportunities and more project-focused, consultative (“brains”) opportunities. With a truly rich pool of available IT personnel, enterprises that have the guts to expand their IT staffs in 2004 will gain some superior internal resources. Many forward-thinking corporations will think hard about doing critical IT work themselves, rather than farming it out to a third party.

By the same token, many forward-thinking enterprises in 2004 will also see their recovering finances as an opportunity to invest in new IT projects that could give them an edge over their competition. A study published last month by research firm Evans Data indicates that business-to-business e-commerce projects will expand by 40% in 2004, and business-to-consumer projects will expand by 20% (see link below).

In many cases, these new and revived projects will be a great source of new revenue for outsourcing companies. In e-commerce, for example, many enterprises no longer maintain a large group of e-business IT specialists – these projects will require outside expertise, often from a third-party vendor. Similarly, a richer IT budget will make it possible for many enterprises to restart IT integration projects that require external consulting.

“Expertise” and “consulting” are the key words in these new project opportunities. In 2004, outsourcing providers will need to refocus their attention on providing intellectual capital to their clients, in the form of best practices, migration methodologies, and IT management processes. If the economy continues to make a positive turn, outsourcers will likely see less emphasis on providing “cheap labor” and more emphasis on providing unique expertise.

Will there be an outsourcing boom – or bust – in 2004? Neither is likely. No matter what the economy, outsourcing has shown a slow and steady growth over the last several years that seems to rise above the tide. Count on outsourcing companies to show their usual 5% to 10% growth in 2004, no matter what the economy does.