Worldwide IT Outsourcing Fattens Up 2012 Spending Pie

Published: August 13, 2012

by Jenny Thomas

When you slice a pie, you might save the biggest piece for yourself, or take just a sliver if you're trying not to overindulge. In the predictions game, finding a glimmer of good news can also depend on how you slice up the overall picture.

The analysts at Gartner have taken another look at the worldwide IT spending pie for this year, and the slice that covers IT outsourcing looks like a good piece. According to a recent Gartner report, worldwide spending for IT outsourcing services is on pace to reach $251.7 billion in 2012, a 2.1 percent increase from 2011 spending that totaled $246.6 billion.

Last month, we reported on Gartner's re-forecast of the whole worldwide IT spending market, which was actually a downgrade to a 3 percent increase over 2011 totals, putting worldwide IT spending on pace to reach $3.6 trillion in 2012. (In January of this year, Gartner analysts had actually predicted we would see 3.7 percent growth in worldwide IT spending for 2012.) The downgrade was attributed to cautious spending brought on by the eurozone crisis, the weaker U.S. recovery, and the export slowdown in China.

The fact is, however small, we will see some growth in worldwide IT spending in 2012, and that growth is coming from somewhere. Thus, the Gartner gurus started slicing up the pie. They found the fastest-growing segment is coming from the IT outsourcing market, and even more specifically from cloud compute services, which is part of the cloud-based infrastructure as a service (IaaS) segment. Cloud compute services are expected to grow 48.7 percent in 2012 to $5 billion, up from $3.4 billion in 2011. This is not surprising as Gartner has been pointing to cloud computing as a growth point for some time now. Just last month, we told you about Gartner's revised prediction for an IT services spending rebound, which analysts are guessing will go up 4.8 percent to $905 billion globally in 2013, driven in part the rise of infrastructure and platform clouds.

The application outsourcing segment is also expected to increase slightly, reaching $40.7 billion, a 2 percent increase from 2011 spending of $39.9 billion. Gartner analysts say this growth reflects the needs of the enterprise to manage extensive legacy application environments and commercial off-the-shelf packages that run the business.

The increase in application outsourcing is also not unexpected, according to Bryan Britz, research director at Gartner. "The burdens of managing the legacy portfolio, along with the limitations of IT budgets, have shifted the enterprise buyers to be cautious and favor a more evolutionary approach to other application services, such as software as a service," Britz said. He explained that while custom applications will remain at the core of many organizations, the trend is toward SaaS enablement in the cloud where new applications can be SaaS-deployed to incrementally extend and modernize the organization's portfolio.

Overseas, while there will be some impact from the ongoing business slowdown due to sovereign-debt issues in Europe and slowing exports in China, Gartner expects the IT outsourcing market in the emerging Asia/Pacific region to represent the highest growth. With the exception of Japan, Australia, New Zealand, Singapore, and Hong Kong, the countries in Asia/Pacific are new to outsourcing usage, understanding, and sophistication. Spending on IT outsourcing in the Asia/Pacific region will grow 1 percent in U.S. dollars in 2012 and exceed 2.5 percent growth in 2013.

In North America, Gartner expects to see more organizations transitioning IT work to annuity managed service relationships to reduce IT costs, which will effectively keep IT outsourcing growing through 2016. Continued reluctance by the enterprise to hire or make large capital purchases, as well as pursuit of asset-light IT strategies, continues to push organizations in this region toward consuming externally provided services.

On the downside, the challenging economic scenario that worsened in many key European countries in late 2011 continues, resulting in a forecast for western Europe IT outsourcing growth to decline 1.9 percent in U.S. dollars during 2012. Gartner analysts believe the European public sector will continue to see a cautious budget environment throughout 2012, as many central and local government entities concentrate on outsourcing initiatives aimed at reducing IT cost.

Data center outsourcing, a mature segment of the IT outsourcing market, represented 34.5 percent of the market in 2011, but growth will also decline 1 percent in 2012. "The data center outsourcing market is at a major tipping point, where various data center processing systems will gradually be replaced by new delivery models through 2016," Britz explained.

The complete report, Forecast Analysis: IT Outsourcing, Worldwide, 2010-2016, 2Q12 Update, is available here on the Gartner website.

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