Report: Outsourcing Is Silver Lining of IT Services Cloud

Economic doldrums continue to erode confidence and drive cost-cutting among IT buyers, according to Gartner Dataquest, and all segments of the IT services market will feel the pinch.

Unprecedented low growth rates will prevail, with IT services revenue growing a meager 2.8 percent to US$557 billion this year, the research firm said.

Three segments of the industry are especially noteworthy, according to analysts: development and integration, management services, and business process and transaction management.

Development/Integration Leads

There are few surprises in the Gartner report, which noted that the development and integration segment continues to lead the IT services industry in size.

A "use-what-you-have" approach is sustaining near-term growth, Gartner said, while collaborative customer relationship management (CRM), supply chain management (SCM), e-commerce solutions and a maturing Web services market will drive moderate growth in this segment through 2005.

"Development and integration services are being hit this year by the combination of the cautious buyer attitude and the lack of a pervasive new technology or 'killer app' that could drive these discretionary purchases," said Kathryn Hale, principal analyst with Gartner Dataquest's IT services group.

Management Services Healthy

Meanwhile, the management services segment has maintained its number two position in the IT services industry, and will continue to show growth despite a slowing economy, according to Gartner.

"IT management is enjoying relatively healthy growth during this economic downturn because of the emphasis on cost-reduction and efficiency enhancement -- both drivers to outsourcing," Hale noted.

Aberdeen Group research director Stephen Lane told the E-Commerce Times that outsourcing is the darling of the IT services industry.

"Outsourcing is a different value proposition entirely," he said. "It should continue to experience strong growth as companies look for more cost-effective ways to accomplish technology goals."

Emerging IT Services

Gartner reported that the business process and transaction management sector also will be spurred by the growing outsourcing trend, making it one of the stronger segments within IT services.

Gartner analysts predicted that this IT subsector will become the number three market over the next few years as economic downturns and increasing competition spur companies to outsource non-core business processes, particularly back-office functions and transaction processing.

All Eyes on Outsourcing

Analysts agreed that outsourcing will remain a major earnings driver in the IT services sector.

"Having the right solution at the right time should support outsourcing through the lean times," Hale said. "As the economy improves, business drivers such as access to key IT skills will drive demand."

Unlike one-time projects that are secured, completed and then paid for, outsourcing is typically based on long-term contracts and provides the predictable annuity revenue streams that make Wall Street happy.

"Outsourcing will continue to be a key area to watch even after IT spending picks up, because people are not going to go back to [the] level of spending that they did during in the late '90s," Lane noted.