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Tech skills gap to fuel IT outsourcing growth among midsized users

Midmarket companies seeking technical skills and cost savings are behind some of the IT outsourcing growth predicted for later this year.

Recent research on IT outsourcing trends among midmarket companies in 2009 shows that outsourcing activities will increase over the next six to eight months, particularly in the areas of application development, hosting and IT infrastructure, as these organizations seek to lower costs and find technical skills they do not possess in-house.

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In its report released last week, " State of the Outsourcing Industry in Mid-2009: Activity to Resume With a More Cautious and Global Focus," AMR Research Inc. points to an impending turnaround in IT outsourcing activities, which declined steeply last fall with the deepening of the economic recession. The survey was conducted in May and June with 700 companies, with the results broken out by enterprise and midmarket firms. AMR defined midmarket as companies with $750 million to $3 billion in revenue.

"[The survey] is a real drill-down on what's driving people to make decisions, what's preventing them and what they will be looking at in engaging third-party service providers," said Phil Fersht, research director in Boston-based AMR's global business and outsourcing services division and co-author of the study.

The initial disruption and up-front investments are the biggest impediments to IT outsourcing adoption in both midmarket and enterprise firms, the study finds. Moreover, a larger percentage of midmarket companies than enterprise firms stated that other business priorities were more important than outsourcing and that they are facing more uncertainty in the recession.

In evaluating providers, they are seeking smaller-scope engagements focused on lower up-front capital expenditures and supported by low-cost offshore and nearshore resources.

The study projects modest IT outsourcing contract growth in the third quarter of 2009, "with a notable spike in new contracts and existing contract augmentation" in the fourth quarter of 2009 and first quarter of 2010.

In the midmarket, application outsourcing is showing "an aggressive adoption curve" in the percentage of companies going that route, which stems both from a lower initial penetration rate and "increased movement from staff augmentation to managed service delivery models," according to the report.

IT infrastructure outsourcing is expected to grow in the midmarket as well, although initial adoption is trending lower as compared with application outsourcing, "largely as a result of razor-thin business cases where the cost/benefit of outsourcing infrastructure services is not as attractive," the report states.

There will also be growth from outsourcers helping midmarket clients move to Software as a Service (SaaS) delivery. This will be reflected in SaaS/business process optimization numbers and underpinned by low-cost process support in areas such as human resources, finance and customer relationship management. This growth will take longer than a couple of quarters to materialize, however, researchers believe.

Motives for IT outsourcing in 2009

Although there were similarities in how companies of varying sizes are projected to take to IT outsourcing in the latter half of 2009, "the motives were very different between enterprise-level and midmarket companies," Fersht said.

Indeed, compared with enterprise corporations looking to globalize their operations, midmarket organizations often seek the process knowledge and technical skills to complete desired services, making IT outsourcing or SaaS managed service models all the more advantageous. This isn't new, but it remains a primary factor as IT outsourcing among midsized firms grows.

"A lot aren't as well resourced, and don't have the depth or the capabilities to do application development or business process optimization as well as larger companies," Fersht said.

Even in this economy we are having difficulty finding the right talent for a number of open positions, so going outside is sometimes helpful.
Tracy Terrill
CIOLegalZoom Inc.
Commodity and nonstrategic IT applications are also a frequent target for IT outsourcing among medium-sized firms. LegalZoom Inc., a 400-person online legal document service, decided last year to outsource its Microsoft Exchange management with Herndon, Va.-based Apptix. The move has allowed the company to redirect internal IT staff time toward other network and service operations, said Tracy Terrill, CIO of Los Angeles-based LegalZoom.

"We use service providers wherever we can," Terrill said. "Email is not our core competency and never will be."

IT outsourcing can also fill the gap when there are vacancies on staff or within their skill sets, Terrill said.

"In this economy, we have 10 open positions in my group, and it is hell trying to hire for them, so going outside is sometimes helpful," he said.

LegalZoom already outsources some software and application development work, as well as HTML coding, for which domestic rates are falling because of the economy, Terrill said.

The company is considering other IT outsourcing options as well, including IT infrastructure, Terrill said, which would give it the flexibility to increase or decrease service levels. That is "a huge benefit, when you can respond to the market," Terrill said.

Let us know what you think about the story; email: Rachel Lebeaux, Associate Editor

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