Springtime joy for outsourcing vendors

After more than two years of near glacial growth, the IT outsourcing market appears to be on a hot streak. Over the past few weeks, outsourcing service providers have been announcing new contract awards as if they were going out of style. Here are just a few examples:

*CSC on May 1 will begin service of a 10-year, $1.6 billion contract to manage the midrange, desktop and distributed computing infrastructure of Motorola. Earlier this month, CSC won an $82 million contract to manage the high-performance computing infrastructure for the U.S. Department of Defense.

*Accenture April 17 announced a five-year, $500 million extension of its contract with AT&T to help integrate and transform the credit and accounts receivable management systems across the telecommunications giant’s consumer services business units.

*HP April 14 announced a 10-year, $3 billion deal to manage the IT infrastructure of consumer products giant Procter & Gamble. HP also reportedly is poised to take over the IT infrastructure of international telecommunications equipment giant Ericsson, although the deal has not been finalized.

*Even EDS, a company whose financial troubles caused it to lose contracts in September, has rebounded with several contract announcements this month. EDS announced a $407 million, four-year contract extension with California’s Medi-Cal Medicaid program, as well as a two-year, $107 million contract extension with the Australian Tax Office. Terms of a new contract with the City of Anaheim, Calif., also announced this month, were not disclosed.

In case you weren’t counting, that’s nearly $6 billion in new contract awards – and those are only a few of the deals announced in the past month. Clearly, a logjam in the outsourcing market has been broken.

What’s behind the new surge in outsourcing contracts? Obviously, one factor is pent-up demand. Many enterprises have been planning IT outsourcing initiatives for months – even years – and have been waiting for the economy to rebound before pulling the trigger. The economy hasn’t rebounded, and shows few signs of doing so, and therefore some companies have decided to stop waiting and take a chance.

In fact, for some companies, economic conditions are driving the outsourcing decision. Companies like Ericsson, AT&T and Motorola are facing a brutal market for telecommunications products and services, and outsourcing IT is seen as a means of cutting costs and improving operational efficiency. In a sense, the very economic factors that previously seemed to be slowing the outsourcing market are now driving customers to it. 

Can the outsourcing momentum be maintained? There are many signs to indicate that growth will remain strong. A multitude of government IT contracts have been signed recently, and a number of others – including the huge Navy/Marine Corps intranet project – are due to be finalized over the next year. Technology Business Research, which tracks the outsourcing industry, predicts that IT outsourcing industry revenue will jump by 12% to 15% this year.

This is not to say that the outsourcing market is out of the woods. Many enterprises still are shrinking from the high cost of major outsourcing contracts, particularly those that require a heavy up-front investment. Enterprises are more likely today to purchase less expensive, more modular services that are focused on a limited set of applications or processes, rather than wholesale IT outsourcing.

For those more focused offerings, however, the opportunities are significant – even in a year when few enterprises are spending any money on IT technology. If the last month is any indication, the IT outsourcing market may have turned a corner – and the way looks clear ahead.