James Murray

For the best part of a decade the IT outsourcing bandwagon has maintained unstoppable momentum. So when a report warns of a dramatic slowdown in the global outsourcing industry, it is worth taking note.

According to a recent study from sourcing advisory specialist TPI, the first quarter of 2007 saw the value of outsourcing contracts awarded slump 31 percent year-on-year to $17.6bn, with the number of deals falling from 99 in the first quarter of 2006 to just 68 a year later. Europe and the Asia-Pacific region still recorded growth in their outsourcing markets, but the US market slowed dramatically, making it the worst global first-quarter performance in five years.

Peter Allen, managing director of market development at TPI, said that the slowdown was a result of the trend towards multisourcing whereby “organisations are engaging in shorter-term deals with smaller contract values because they want best-of-breed solutions”. But while this is undoubtedly the case, I’m not sure it fully explains such a dramatic market slowdown.

Along with the shift towards smaller, more specialised deals, there is a growing sense that the IT outsourcing market is approaching maturity. As customers break up their multi-billion dollar deals into smaller contracts they are realising that not everything can be successfully outsourced.

The idea of slashing costs by shifting as much IT work as possible to third parties is being replaced by a more astute management philosophy whereby executives assess whether it is appropriate to outsource a function before doing so. It may seem like a basic best practice but it is one many firms appeared to have forgotten.

This does not mean that outsourcing is finished; the market will continue to grow for years to come, particularly outside the more mature US sector. However, outsourcing is no longer regarded as a panacea for all IT woes; instead it has finally taken its rightful place as just one of many strategies a business can adopt for running its IT operations.

This new-found maturity should also limit the risks associated with outsourcing because firms will only outsource functions they are confident can be successfully managed by a third party. Meanwhile, outsourcers that are seeing the pool of potential new customers gradually shrink will have more of an incentive to increase their focus on keeping existing customers happy.

The slowdown in the outsourcing market may be frustrating for the IT outsourcers who are used to double-digit growth, but for the rest of the business community it represents nothing but good news