Stan Lepeak, Managing Director, Global Research

EquaTerra released today the 2Q10 edition of The Echo, a quarterly wrap-up and analysis of events and trends in the global business and information technology (IT) services markets. I excerpt  here some final thoughts on 2Q10 activity in the third-party business and IT services marketplace:

A growing question in the market for third-party business and IT services is whether the second straight quarter of unexpected slower growth is an aberration, a residual impact of the hangover from the bad economic times of 2008-2009, or the early signs of a more fundamental shift in buyer sourcing preferences. It is clear that long term SaaS and BPaaS models will lead to a permanent decline in the use of third-party systems integration and implementations services. To most involved – except larger providers of these services – this is a good thing given the mixed track record of under-fulfilled expectations and over-budget costs these efforts have entailed.

The situation with ITO and BPO is more complex. This market has for some time been moving beyond  the legacy model of taking over problematic buyer assets, processes and resources and hoping to improve them over time (“your mess for less”). Buyers “plugging into” standardized best practice service offerings from third-party providers (i.e., ADP payroll on a grander scale) has long been the industry mantra and is now becoming more often an industry reality. Cloud services, whether from upstart or legacy software and service providers, will further enable this. The ultimate winners on the provider side will be those firms that can combine the best of legacy software and outsourcing models with new capabilities enable via the cloud.

This is clearly a long-term proposition for providers and even more so for buyers. Larger buyer organizations have significant sunk costs in existing IT and business process systems and resources. Moving away from them to a cloud model is an incremental process that will often prove as painful as moving to commercial ERP platforms and global service delivery models. As with many things, the winners – or those organizations that can exploit new software and service delivery capabilities to the greatest extent – are those firms that excel at execution of a realistic, yet appropriately aggressive service delivery strategy. So while it’s exciting to ponder the future wonders of cloud computing, those buyers that are developing an overall strategy and are also in the weeds of when, where and how cloud services can truly create a competitive advantage are in the right place at this time in the evolutionary cycle.

Lastly, it stands to reason that buyers today are spending more time looking inward for the resources and skills to address their most pressing business problems. This is, however, a cyclical and short term phenomenon. It is a function of operating under more cautious and prudent market conditions and recognition that some of the sourcing efforts undertaken over the past few years are unpalatable in today’s more risk averse environment. Longer term, however, most western organizations are operating in an environment of scarce and expensive skills, aging workforces, rapidly advancing technologies and, perhaps most importantly, increasingly strong global competition. These collective market trends will continue to drive increased specialization and increased use of third-party services and supporting technology solutions, albeit ideally in ways that are easier to deploy and more successful in their usage.

For more from EquaTerra on market trends, read the 2Q 2010  EquaTerra Advisor and Service Provider Pulse Survey Results.

Filed under: Information Technology (IT), Market Trends and News, Outsourcing by EquaTerra