85% of Organizations Anticipate Spending on External Service Providers

March 15, 2010

Signs of increased spending with external service providers (ESPs) when the economy recovers, point to a return to growth in the IT services market in 2010 and beyond, according to a recent survey by Gartner, Inc. The survey showed that when the economy recovers, 85 percent of organizations anticipate that their spending with ESPs will increase or stay the same.

Furthermore, in their business planning, 76 percent of organizations surveyed are optimistic about the economic recovery time frame, indicating that in their planning cycles, they are seeing that the recovery already began in 2009 or will occur in 2010.

In November and December 2009, Gartner conducted a survey of 1,073 respondents, covering a range of company sizes and vertical markets (excluding government organizations) across three regions (America, Europe and Asia/Pacific) to determine how economic changes have impacted IT services buying and decision making.

"The impact of the global economic recession in 2008 through 2009 has been significant, in some cases radically changing a vertical market or a company's competitive position. Buyers of services have been impacted in many areas, making them more cautious regarding IT spending," said Allie Young, vice president and distinguished analyst at Gartner. "In terms of IT services spending, the recession has been clearly felt by organizations, which report the following changes in their behaviors: increased contract renegotiations with ESPs, greater influence of the CFO and procurement in IT services spending, and increased levels of offshore services usage. However, the good news for service providers going forward is that the majority of buyers of IT and business process services will increasingly turn to ESPs to support the execution of their IT strategies."

Ms. Young said that the results of the survey confirm an overall positive market acceptance of ESPs to support IT initiatives. Nevertheless, regional and vertical differences will apply and must be factored into client needs, and will be discussed in other Gartner research. For example, in 2010, the overall mean average for spending with ESPs is predicted to increase 7.13 percent. Yet there is a great degree of variation by country; for example, India users expect to increase spending by 17.4 percent, and Japan users expect a decrease of 1.5 percent.

Service providers that prioritize understanding the marketplace and monitoring the changes in their client and user environments will be best-prepared to capitalize on growth. The days of "low-hanging fruit" and sole-source decision making in IT services are largely over; however, through deep relationships, providers still rely on new opportunity leads and expansion of services from existing client relationships, often as sole-source opportunities.

"Although there are positive signs of a return to growth, we will remain in a hypercompetitive IT services environment for some time, with more provider options for buyers to consider, a focus on cost continuing to dominate in buyer considerations, and very likely more providers pursuing the same opportunities," said Ms. Young. "Service providers across all types of service categories and relationship models have the potential to capitalize on growth opportunities as the economy recovers, yet there will likely be little relief from the extreme competitive challenges experienced by service providers in the 2008-through-2009 economic downturn."

According to Gartner, to be successful, highly disciplined service providers must focus on the following:

Balance: Service leadership will need to focus on balanced strategies of being aggressive/proactive to capture growth, but also highly attentive to monitoring changes in their client environments and the economies and vertical markets they serve to know how and when to react. Prioritizing market/client knowledge and insights to drive internal optimization of strategies, processes, delivery, skills, and reaching clients will separate the leaders from the followers.

Agility: Sales, marketing and service delivery teams must work closely to deliver on the promises made to win deals. Yet accounts are never static, and more than ever providers must be agile to respond to changes in the competitive market, in economic conditions, in vertical sectors, in the talent pool, and in technology. Failure to respond quickly will compromise relevance to their clients. Ensuring the right investments in their own internal operations to achieve this agility will be a task that providers will need to take seriously.

Cost-competitiveness: Pursuit teams must recognize that their clients want, need and expect cost-competitive answers to their IT needs. This does not negate the value and business insight that providers can and must bring — but without cost-competitive responses, providers will never begin to build trust and gain a position to communicate their value message. Pursuit teams must hone their skills to identify which deals are the right ones to pursue, and which are the ones to walk away from.