IT Outsourcing Hits Nine-Year Low In Q3
Companies held off on major tech projects during the period amid the weak global economy.
Deal volume also fell sharply. The third quarter saw a total of 332 deals signed, down 24% year over year.
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The numbers come on the heels of a marginally improved second quarter for the industry. "The signs of recovery in the IT services market apparent in the second quarter of 2012 were largely conspicuous by their absence in 3Q12," said Ovum senior analyst Ed Thomas.
The analyst blamed the tech services downturn on the weak global economy. Looking to the fourth quarter, "There will need to be a significant upturn in both TCV and deal volume if last year's performance is to be matched," said Thomas.
[ Read Sorry, But Outsourcing Isn't Evil. ]
Ovum said Q3 outsourcing numbers would have been even worse were it not for a pair of unspecified, multi-billion dollar deals procured by IBM and CSC.
Outsourcing can help companies cut costs if work is farmed out to low-cost regions such as Asia or Eastern Europe. But the industry is not immune to recession as poor economic conditions mean businesses have fewer dollars to invest in new tech projects that might contain an outsourcing component. Twenty-six percent of 564 respondents to InformationWeek's 2012 State Of IT Outsourcing Survey cited high costs as their primary reason for not outsourcing, second only to the 44% who said they have no need for such services.
Survey respondents also cited communication problems, unforeseen costs, and management time as being among their top concerns when it comes to outsourcing.
Ovum said the number of private sector outsourcing deals inked in the third quarter hit a nine-year low, while the number of public sector deals came in at a three-year low. The research firm said activity in the North American market was particularly weak.
U.S. companies might have held back on outsourcing during the run-up to the November election to avoid becoming part of the political debate. President Obama chided Republican challenger Mitt Romney for investing in companies that outsource during his tenure as CEO of Bain Capital. The Romney camp responded by pointing out that John Rogers, chairman of the President's Advisory Council on Economic Capability and a top Obama fundraiser, is CEO of Ariel Investments, which holds a significant equity stake in offshore outsourcing specialist Accenture.
Some companies have committed to bringing tech jobs back to the U.S. and to do more work in-house, whether for political or other reasons.
General Motors has said it plans to move its IT operations in-house over the next three years. As of July, about 90% of the company's tech work was farmed out to third-party providers using both on and offshore workers. GM CIO Randy Mott told InformationWeek earlier this year that he believes insourcing can reduce bureaucracy.
"When the business says 'go,' then that means we start working on a contract, we don't start working on a project," Mott said of the automaker's outsourced model.
Earlier this month, Apple CEO Tim Cook said the company would start manufacturing at least one model of the Mac in the U.S. starting next year. The move is expected to create about 200 jobs. Meanwhile, China's Lenovo, which acquired IBM's personal computer business for $1.75 billion in 2005, said it plans to open a manufacturing plant in North Carolina.
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