IT spending on outsourcing is rising sharply this year after remaining somewhat restrained over the course of the recession. This expansion in IT outsourcing reflects both the cyclical recovery in IT spending and, we believe, the longer-term growth in IT outsourcing as percentage of total IT spending.
Our annual outsourcing study,IT Outsourcing Statistics 2012/2013, finds that the percentage of the IT budget designated for outsourcing services is up 23% at the median in 2012 over the prior year, an increase that marks a distinct change from the prior three years for the typical IT organization in North America.
Figure 1 shows that among organizations that outsource IT work, the percentage of their total IT budgeted for outsourcing services rose to 8.6% at the median, from 7.0% the prior year, for an increase of 23%. In 2011, spending on outsourcing had remained at about the same level as 2010.
Over the course of the recession, many organizations reduced spending on outsourcing services, particularly application development, and a rise in outsourcing activity would be anticipated at the start of a recovery period.
With this budget cycle, however, IT organizations are increasing both IT spending and, in a significant way, spending on IT outsourcing. While this is partly cyclical as organizations renew spending on application development and other capital projects, we believe the longer-term outlook is for outsourcing to consume a larger share of the IT operational budget.
As our analysis shows, IT organizations are beginning to embrace cloud-based applications as well as expand outsourcing of data center operations. Other factors are also supporting decisions to outsource IT functions, including the ever-present desire to reduce costs.
The use of software-as-a-service (SaaS) continues to gain strength, making application hosting the fastest-growing outsourcing service in the study. While the amount of the typical portfolio being hosted by outside parties remains low, the number of organizations outsourcing application hosting is up nearly 37% year-over-year and more than half of all organizations that outsource this function are planning to increase the amount of work they outsource. Please note that in this study we do not distinguish between multitenant cloud applications (SaaS) and single-tenant hosted applications: we group both of them into an outsourcing category we refer to as “application hosting.”
Data center outsourcing is another form of outsourcing with a positive trend line. There is a connection here with the previous finding. Advancements in data center technology are creating economies of scale for data center operators as well as SaaS solution providers.
Web/e-commerce systems and application development are the two most widely outsourced functions. The outsourcing of application development surged over the past year, but the rebound is mostly cyclical. The trend indicates slower growth is ahead. Likewise, web/e-commerce systems outsourcing is another mature service at a high adoption level that is likely to grow relatively slowly compared to other services.
Help desk and desktop support are the IT functions with the greatest potential for successfully reducing costs through outsourcing. That is no surprise. Meanwhile, the functions with the greatest potential for improving service are desktop support and IT security. That makes desktop support a clear winner in the customer experience category. This analysis suggests times are changing. Organizations often shied away from desktop support outsourcing because of concerns about service. Today, while customers are still not singing the praises of desktop support service providers, they are at least satisfied service providers are doing as good a job as internal support staff.
In this study, we profile outsourcing activity for 11 IT functions: application development, application hosting, application maintenance, data center operations, database administration, desktop support, disaster recovery services, help desk services, IT security, network operations, and web/e-commerce systems. For each IT function, we look at how many organizations are outsourcing work and how much of their workload is being outsourced. We then present current plans by IT organizations for outsourcing each function, which gives us an understanding of whether outsourcing of a function is rising or falling. Finally, and most importantly, we measure the success IT organizations are having in lowering costs and improving service levels through outsourcing. This Research Byte is a brief overview of our report on this subject, IT Outsourcing Statistics 2012/2013. The full report is available at no charge for Computer Economics clients, or it may be purchased by non-clients directly from our website (click for pricing).