Is the IT outsourcing industry in trouble?

Do Government cuts and falling confidence mean the IT outsourcing sector is about to face some hard times?

By Tom Brewster, 1 Jun 2010 at 15:06

IT outsourcing could be in for a rough ride in the coming months and years.

Not only have the government’s swingeing cuts caused damage to some of the big players in the industry, there are signs that confidence in outsourcing is in decline.

Is this the start of a slippery slope for the industry, or just a blip in the life of IT outsourcing?

Government cuts

Let’s start with the bad. Certain elements of the IT outsourcing segment have been hit hard by the cuts recently announced by Chancellor of the Exchequer George Osborne.

A total of £95 million is set to be slashed from public sector IT spending and Osbourne claimed that £2 billion was being wasted by the Labour government on IT projects, suppliers and property.

The £100 million cap on future government IT contracts will also surely harm outsourcing firms looking for big money deals.

Indeed, there are various deals that could be under threat, according to John O’Brien, a senior analyst at Ovum. He pointed to agreements signed in the dying days of the Labour government, such as the desktop services contract involving Fujitsu and the Department of Work and Pensions.

“Those probably could be reviewed because they fall outside of that £100 million ceiling. Obviously they would have to be revisited by the new government. It is still early days to see how they might approach that,” O’Brien told IT PRO.

As the vendor helping run the Child Trust Fund, which is to be scrapped under the coalition’s plans, leading UK outsourcing company Capita Group has also been hit hard by the spending streamlining.

Not as bad as it seems

While the Government’s reductions in public spending may make a small impact on IT outsourcing, the sector is actually set for good times ahead, according to chairman of the National Outsourcing Association (NOA) Martyn Hart.

“In the medium term, the impact [the cuts] might have is that projects that were in the process of being placed [such as] IT outsourcing contracts might be delayed or scaled down,” Hart told IT PRO.

“However, in the slightly longer medium term, like 18 months, because that is how long it takes the government to procure, it is likely the actual market for IT outsourcing services will rise because what the government has got to do is save a lot of money and they can do that with outsourcing,” he added.

Hart believes that there will be a flat period for the segment, which may be followed by a minor dip, before a fast-rising upwards curve.

The rise of the small provider

If the Government cuts are not going to be overly damaging for IT outsourcing, they are going to mix things up a little for providers wanting to work in the public sector. Ovum analyst O’Brien made the point that the sector’s smaller companies will actually benefit from the £100 million cap.

“They [the Government] clearly want to break up some of these big contracts into smaller components and that’s good news for the smaller suppliers and it’s welcome news that they want to publish future IT procurement contracts over the value of £25,000. That is certainly bringing the value right down," O’Brien said.

“The big companies are going to have to learn how to play by different rules now because they are going to have to partner much more affectively with other providers.”

To remain under the £100 million cap, partnering with others may be essential for those wanting to carry on working with government, O’Brien added.

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Outsourcing : Analysis & Insight

2 comments

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Understand the Customer/Client?

My main objection to outsourcing, specifically abroad is simple. When a customer calls for support they are either a) frustrated, b) annoyed. If they cannot understand the person they are talking to, or be understood by them, because of accent issues, then even the frustrated will swiftly *become* the annoyed. All support staff need to be able to understand the customer *and* be understood by them. I've worked in phone based jobs for 14 years but sometimes even I have problems with thick accents.

By CeltiKaos on Friday Jun 4

Cost Cutting

Let me tell you how outsourcing really works. Senior IT managers get rid of loyal inhouse staff that know what they are doing in order to reduce the payee pot replacing them with external people that don't have a clue what they are doing and no loyalty to your company whatsoever. Once things start to go wrong because of all straight-to-production hacks taking place in the background you spend a lot of time waiting for the 'needful' to be done and awaiting the arrival of that promised root cause analysis report which you know darn well will never ever arrive. Then senior IT managers do the sensible thing and bring contractors in at three times the cost to sort out the mess. That is how it really works and will work like that until there comes some business user with more than 3 brain cells (if there is such a thing) and looks at the overall cost of the outsourcing (the cost of wasted time dealing with countless fatal errors + the cost of bringing contractors in). After that, senior IT management fold their tents and off they go to 'cut costs' somewhere else.

By Ananda on Saturday Jul 3