Mega outsourcing deals, R.I.P.

After growing steadily even as other segments of the IT industry declined due to the recession, IT outsourcing, consulting and deployment services — the mainstay of Indian IT industry — will grow slower than the other segments in next few years, Forrester Research has warned.

The slower growth is not only due to the lack of a strong ‘bounce back’ effect, but also because of an overall “disenchantment” with the performance of big ‘total outsourcing’ deals in recent years, the firm said.

Over the next two years, US IT outsourcing — the complete hand-over of the IT functions of a company — and IT consulting and deployment will grow by around 6% and 6.8% per year, respectively. In comparison, software, which accounts for 35% of the overall US IT spending, will grow by around 11.5% per year during the current year and the next.

The forecast is in sharp contrast to how outsourcing performed during the recession.

Hammered by a need to cut costs, US firms continued to hand over their IT needs to outsourcing partners, ensuring that outsourcing remained in growth territory even as overall IT spending in the US fell by around 8% in 2009.

Despite the increase in outsourcing, however, large Indian outsourcers such as Infosys and Wipro have not reported big-ticket deals since the recession began two years ago. This is likely to continue, said Andrew Bartels, principal analyst at the US-based market intelligence firm.

“There is a sense of disenchantment with large-scale IT outsourcing. Companies have realised that whole-scale IT outsourcing leaves you much more exposed. They are likely to go for more granular deals in the future,” Bartels said.

He said the end of the recession is unlikely to change the scenario. “More companies will start to drop out. Rather than starting with outsourcing, they will look at ownership… cost becomes much less important. Outsourcing will do poorly compared to the other sectors,” he added.

However, Forrester’s growth projections for the IT outsourcing, consulting and deployment services — accounting for around 31% of the US spending on IT — are in line with the 6-7% growth posted by the industry before the downturn.

Besides outsourcing, Bartels was unimpressed by the hype around cloud computing, especially selling software through the Internet.

The three layers of vendors in a cloud ecosystem — raw infrastructure, the software platform built on top of raw infrastructure and the applications built on top of software platforms — contribute only around $12 billion (0.7%) out of the $1.6 trillion global IT spending.

This will increase to around $33 billion by 2013, contributing around 1.8% of global IT revenues.

Bartels said cloud deployments are coming up against challenges like integrating such offerings with the existing on-premise software, security and the lack of assurance of future costs and pricing. “There are natural limits that will keep it from taking over everything,” he said.

Forrester, however, warned that the rise of the cloud will be at the expense of traditional IT revenues. “Cloud computing takes revenues out of technology, it does not add new revenues,” Bartels added.