Gartner Analysts: Outsourcing Will Only Grow

"In 2000, we reached the tipping point where spending on external IT services [project-based and outsourced] exceeded internal IT spending," said Linda Cohen, a managing vice president at Gartner Inc. At the same time, the "outsourcing service market is growing while other service segments are flat or shrinking."

Therefore, according to Allie Young, Gartner research vice president, outsourcing will become an increasingly larger part of how companies—both large and small—do their business.

But at the same time, the market is changing in another fundamental way for resellers and integrators. "There is a new phenomenon as more vendors see uptake in outsourcing and the opportunity to forge multiyear relationships: Vendors are entering the outsourcing market at all levels," Young said.

In short, resellers and integrators will need to look carefully at their vendor-partnership relationships to avoid situations where their "partner" is actually stealing their business.

"By 2005, the number of IT providers that claim outsourcing expertise will increase by 40 percent," Gartner analysts predict.

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Gartner's Cohen outlined the changes in outsourcing. "Consultants and integrators, arguably late to the game in outsourcing, supplied project work for their core competencies in applications and IT consulting," she said.

"They enjoyed high demand and high margins for many years, but economic slowdown and a shift in the market dynamics to accept longer-term accountability via outsourced relationships have made the move into outsourcing inevitable."

Looking ahead, outsourcing will become a "bifurcated world where two distinct offering types will exist: customized or standardized," Young said. But outsourcing also will become a more complicated world in general, with the analysts expecting to see a wide variety of types emerging to meet every possible kind of IT demand from businesses.

Within that complex, though, the analysts said there will be "a strong trend toward standardization and industrialization of IT services transforming the market—first and foremost at the infrastructure layer."

This will mean, according to Gartner, that we're going to continue to see a shift from "outsourcing contracts" that provided "in a myriad of ways, often unique and customized [IT] to the client" to "a standardized utility approach."

Has outsourcing hit a fault line in tech? Click here for a column.

But where will these new services be hosted? At home or offshore? Offshoring has become "one of the hottest political, business and IT issues today," Cohen said. "Offshore is an irreversible megatrend."

But analysts noted a misperception in how the term "outsourcing" is being used interchangeably with "offshore." They're not the same.

But in either case, they said, companies are going to be looking for the most bang for their buck.

And what does all of this mean for the channel?

"The few survivors in the ASP [application service provider] and hosting world are seeking to perfect their shared models and convince buyers of the value," Young said. "However, only those vendors with deep pockets or access to key partners with financial strength, brand value, vertical expertise and others will be able to make this move."

Another problem for ASPs and MSPs (managed service providers) is that "ISVs have now realized that an ASP-like, 'software as service' model potentially protects their licensed business and helps create greater satisfaction with their products, and thus loyalty." As has been all too common in the past for channel businesses, the specter of direct competition with one's ISV or hardware partner again rears its ugly head.

"IT outsourcers have a business imperative to migrate commoditized IT outsourcing contracts into their infrastructure utilities," Cohen said. "In particular, IBM with its OnDemand and Hewlett-Packard with its Adaptive Enterprise strategies have the most evolved packages."

The analysts also believe that "consultants and integrators that bring industry or process expertise—or have strategic clients willing to push the envelope—have begun to target business process utilities for shared use. The one-to-many offers bring a scalability that is uncommon for this group of vendors, which have thrived on custom work with high margins."

In summary, outsourcing will only continue to become more important for business. Thus, whether you call yourself an integrator, a solutions provider or a VAR, you need to be ready to address your customers' outsourcing needs.

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