IT Outsourcing Services Take a Hit, and That Could Be Good for Nimble Providers

Analyst reports don't come with little smiley-face icons but they almost always trumpet optimism, even when things are not exactly chipper. Through all kinds of economic ups and downs, the report writers generally focus on the happy. "The sector declined by 50% this quarter, but just wait til next quarter: We see 120% growth!"

This week Ovum issued an announcement that its data shows what a rough few months it has been for the IT services sector. Total contract values are way down during the second quarter: down by 40% compared to the same quarter last year. In fact, Ovum says, it's the lowest quarterly number since 2003. Yikes.

The number of deals worldwide also fell — to 384. That's the lowest tally since 2007, according to Ovum's IT Services Contracts Quarterly Analysis, Q2 2011. “Not only was this down more than 20 per cent on the number tracked during the second quarter of 2010, but it was also the lowest number of deals recorded by Ovum in a single quarter since Q4 2007,” the report said.

Granted, there were some bright spots, relatively speaking. In the Asia-Pacific region, for example, total contract value declined by only 4%.

It's the lousy U.S. economy that is bringing things down. Making it worse is reduction in IT spending by governments. “In previous quarters, the buoyancy of the public sector outsourcing market has gone some way toward offsetting the lackluster returns from enterprise clients," said Ovum analyst Ed Thomas. But that's no longer the case, he said, as there has been "a notable lack of large-scale projects on offer."

And maybe humongous IT outsourcing deals are a thing of the past. As an editor at The Register put it: "Mighty mega-deals of old now well-nigh extinct."

But there is something else at work here: IT buyers are looking for evident, bottom-line advantages from outsourcing services. They want what TPI, in a recent report, called "hard benefits." Clients are being very careful about expenditures, says TPI chief researcher Paul Reynolds. “Outsourcing spending is being impacted by everything from new strategic drivers and new regulations to changing attitudes about offshoring and emerging technologies such as cloud computing," he says.

Those "changing attitudes" represent opportunity for smaller, nimbler providers of IT services. As Reynolds explains, businesses want their IT provider to give them things they cannot attain in-house. Businesses want and need help with the transformation process. In these shaky economic times, many managers don't know what to do next. CIOs are being told to serve up "innovation," like it comes in a box like new software. Their expectations as IT buyers go up. They want cost savings, and they want transformative solutions.

The IT outsourcing company that is resourceful, flexible, and collaborative has a great chance to help clients with these kind of nebulous but essential goals. Hard times on the sourcing front can be turned around by providers who can meet the bottom-line objectives while at the same time developing solutions that the client cannot see through the fog of a seriously slumping economy.

And that's the good news.