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Economy could break outsourcers, analysts say

Economy could break outsourcers, analysts say

Even as the IT services industry grows, Gartner says outsourcers need to guard against bankruptcy

Demand for IT services continues to grow in the depressed economy, but outsourcers still face financial challenges as the economy forces them to evolve their services and customers continue to seek reduced pricing and smaller deals.

Gartner this week at its Outsourcing and IT Services Summit in London discussed why service providers need to safeguard themselves against bankruptcy and shared the signs enterprise IT customers should watch for when selecting an outsourcer. Gartner recently reported that worldwide IT services revenue in 2008 totaled US$806 billion, up 8.2% over $745 billion in 2007. IBM, HP and Accenture garnered the top three market-share positions and brought in $58.9 billion, $38.5 billion and $23.7 billion in 2008 revenue, respectively.

Yet that growth is significantly less than in previous years. For instance, while HP ranks second in terms of market share, due to its acquisition of EDS, the company grew its revenue by less than 2%. And India-based vendors increased revenue by 12.9% in U.S. dollars, but that is markedly less than the 39.8% growth the same vendors experienced in 2007.

"Vendors had six to eight months of 'business as usual' in 2008 and then approximately four months encountering the beginning of the global economic downturn, featuring widespread cost restrictions and cost reductions," said Kathryn Hale, research vice president for Gartner's worldwide IT services group, in a statement. "This is particularly surprising, because in economic hard times the potential cost savings from outsourcing usually keeps this market segment buoyant. However, apparently buyer hesitation to commit to long-term requirements of outsourcing agreements took precedence in 2008."

For 2009, the same market conditions could drive some service providers out of business, Gartner suggests. With a rise in contract renegotiations and the development of alternative delivery models such as cloud computing and software-as-a-services, service providers need to ensure price reductions don't hurt their bankrolls.

"Although these potential price reductions are a positive indicator for end-user organizations, they hide a major risk for the market as a whole," said Claudio Da Rold, vice president and distinguished analyst at Gartner, said in a statement. "As price reductions of more than 10% would be higher than the net profit of most IT service providers, they could potentially make them bankrupt."

Gartner says that service providers need to equip their offerings with greater flexibility, establish alternative delivery options and ensure critical customers are satisfied with contracts. And end-user organization should watch service provider behavior to determine the health of the company going forward. According to Gartner, "savvy providers" will reduce costs for customers by cutting staff, using automation and standardizing processes.

"Struggling providers will concentrate on protecting their existing business and reducing cost, as the only approach to margin protection. The duration of the downturn will dictate their future," Da Rold said.

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