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Recent trends in the software development industry indicate that IT outsourcing is becoming more specialized and fragmented among several vendors; cheaper thanks to automation; and, apparently, more standardized. Concerning the latter, we’ve got some reservations.
Contrary to some gloomy predictions, outsourcing IT services is not dead. According to outsourcing advisory firm Information Services Group (ISG), clients are signing more and more deals, though for less overall value. In 2013, the total annual contract value fell by 8 percent, for the fourth consecutive year of steady decline. Meanwhile, the number of agreements signed continued to rise last year, especially those in a relatively low value range. The average spend per company has decreased by $6 million from 2012 to 2013.
ISG expert Kathy Rudy attributes this trend partly to lower prices in outsourcing IT services. But the key reason, she says, is that clients are willing to go to multiple suppliers that can fill specific needs in an optimal way, instead of adopting a one-size-fits-all approach.
Large, single-sourced IT deals just won’t cut it anymore. Clients see the impact of cloud computing and labor automation and they become wary of universal, long-term contracts which might lock them into a static solution that becomes obsolete overnight, Rudy explains. Instead, they opt for the flexibility of shorter, smaller deals with several providers. The flipside of this approach, as we’ve mentioned before, is that getting competing suppliers to collaborate on behalf of the client is quite a challenge. But it seems that companies are willing to invest in the people and the mechanisms necessary to manage multisourcing IT services.
Low prices beget even lower prices: as contract revenues continue to fall, IT service providers will rely on automation to cut operational costs and increase their profit margins, according to ISG. “Labor arbitrage can only get you so far”, says Rudy. “To realize significant savings you have to attack the processes and inefficiencies in service delivery.”
ISG also predicts that custom software development will be on the decline, as more and more clients become willing to adapt their processes to suppliers’ standards, which used to be the other way round. This means they’ll have to factor in the operational risks that come with more standard solutions. “The onus of integrating these services and ensuring closure of any gaps in level of service will now be the responsibility of the client,” says Lois Coatney, another ISG consultant. “It’s becoming imperative to have the flexibility to scale these standard solutions so that they can respond to evolving business requirements.”
A likely consequence of IT services becoming more standardized is that providers will adopt mass production principles to maximize efficiency and to attract higher volumes of the small-scale projects currently available, ISG experts say.
Not at Liemur, though: when it comes to outsourcing IT services, we constantly strive for quality over quantity and continue to provide custom software development solutions.
Which approach would you prefer?
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