IT Outsourcing Popularity Declines, According to New Computer Economics Report

IT outsourcing has long been hailed as a bottom-line friendly strategy for companies of all sizes – but new research from Computer Economics reveals new business imperatives that threaten to turn that Conventional Wisdom on its head.

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Last year, IT organizations significantly increased the percentage of their budgets allocated for outsourcing, according to a new study from Computer Economics. But in this year’s study, not only did they pull back to previous outsourcing levels; they dropped to the lowest level in five years, according to the new IT Outsourcing Statistics 2018/2019 study from Computer Economics.

“From the recovery after the Great Recession to about two years ago, IT outsourcing was pretty flat,” says Dave Wagner, Vice President of Research, Computer Economics. “We were finding the average IT budget spending was somewhere in the 10-to-10.5 percent range. Last year, it took a fairly surprising jump up to 11.9 percent.”

What’s interesting in this year’s study is not only did it drop from 11.9 percent, but it declined to a staggering 9.4 percent. “We characterize the situation as volatile – we had a big jump, we had a deep decline – that’s unusual, to be honest,” Wagner says.  “We’re seeing that companies of different sizes are on different journeys right now.”

This decline has two primary causes. First, favorable economic conditions are allowing IT leaders to invest in selectively bringing outsourced services back in-house. Moreover, with increased use of the cloud, there is simply less need to outsource support of internal IT infrastructure.

The percentage of the total IT budget being spent on outsourcing declined from 11.9 percent in 2017 to 9.4 percent in 2018. This represents a major decrease even from previously established norms as organizations have hovered between 10.2 percent and 10.6 percent before last year’s temporary increase.

Small and mid-sized companies are decreasing the amount that they are outsourcing. Large companies at the median are actually increasing the amount that they outsource. “We think a lot of this has to do with the cloud,” Wagner says. “There are obviously economic factors -- whenever the economy is strong and IT spending is up as it is, our survey shows IT as a percentage of revenue went up this year -- outsourcing tends to decline. People are bringing their work back in house.”

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Computer Economics’ research also shows that small and mid-sized businesses are much farther along in their journey to the cloud, automation, SaaS and virtualization – technologies that we know reduce the infrastructure burden as a whole. “We believe small and mid-sized companies are reducing their infrastructure burdens,” Wagner says. “And because their infrastructure burdens are smaller, and because they are technologically more advanced and easier to manage, they have less reason to outsource. Whereas larger companies still have a larger infrastructure burden, more legacy systems, more complicated reality. Because of that they are seeking outsourcing as a remedy for that.”

Other Keys to IT Outsourcing:

  • Data center operations and IT security have dropped the most in terms of the percentage of companies outsourcing these functions. In 2017, 41 percent of companies outsourced at least some of their data center operations, compared with 35 percent in 2018. In 2017, 43 percent of organizations outsourced at least some of their IT security, compared with 37 percent this year. The fastest-growing function for outsourcing is application development. Fifty-three percent of organizations outsourced at least some of this function in 2017. About 56 percent are doing so in 2018—a small increase.

  • Application development also is the most frequently outsourced function in the study. As stated above, 56 percent of organizations outsource some or all of this function. Application development continues to take larger parts of the IT budget, and many IT organizations are looking to get more out of their internal staff through selective use of outside development firms.

  • IT security outsourcing is increasing at the fastest rate of all outsourced functions in terms of the percentage of work outsourced, with 48 percent of respondents reporting that they will increase the amount of security work that they outsource. Even though the percentage of companies outsourcing IT security declined this year, those that are still outsourcing IT security are sending a greater percentage of the security work to outside service providers. With the constant coverage of high-profile security and privacy breaches and rising variety of threats, it is no surprise that IT organizations are using security service providers to bolster their defenses.

  • Organizations that outsource favor help desk support and web operations as functions where they are moving the largest percentage of work to service providers. Much of this work involves commodity skills that many organizations find easy to send to service providers.

  • Help desk support and disaster recovery are the top IT functions for reducing costs through outsourcing. The economies of scale that service providers offer make these areas good opportunities for cost savings.

  • The functions with the greatest potential for improving service through outsourcing are IT security and database administration. IT security is an area where the motivation to outsource has less to do with saving money and more to do with having the job done better than it can be done in-house.

  • The outsourcing of database administration delivers the best value when looking at both cost and service delivery. Database administration and disaster recovery are the only functions that have a high cost-success and service-success rating. For other areas, there is generally a trade-off between saving money and improving service levels.

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