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Outsourcing IT application management on rise for 2010; here's why

The effects of the recession continue for 2010, with outsourcing IT application management and maintenance expected to be robust, while application development won't bounce back.

Fewer organizations expect to outsource IT application development in the coming year, due to concerns about cost and time overruns and a wish to keep initial application work in-house, according to recent research. But more firms, such as Nokia Siemens Networks B.V., are looking to outsource IT application management and maintenance as a cost-saving measure.

Telecom giant Nokia Siemens Networks recently signed a three-year IT application management services agreement with consulting and outsourcing firm Accenture PLC. Under the terms of the agreement, Accenture will manage applications related to Nokia's human resources and finance and control functions, as well as Nokia's corporate-wide tools and platforms. IT application management around these functions was previously outsourced among a number of vendors.

Nokia Siemens CIO Manfred Immizer said that the outsourced management services include maintenance, monitoring and enhancements for Nokia Siemens' systems where appropriate. Outsourcing these applications in bulk provides an economy of scale such that "the cost reduction compared to the baseline we have today is very significant," he said. (Financial terms of the deal were not disclosed.)

Manfred Immizer
Manfred Immizer

The need for consolidating and outsourcing IT application management stems from the merger of Nokia's Network Business Group and Siemens AG's COM division two years ago. The combined company operates in approximately 200 countries worldwide and has about 60,000 employees.

"These were two big companies with very different cultures and governance models merging, which requires a heavy integration process," Immizer said.

"From the past, we inherited a lot of different systems [developed and managed] by different companies," he said. "Bringing them together from two worlds, we needed to make a clean cut."

Outsourcing application development less popular now

Nokia Siemens Networks' deal is part of a larger swing toward outsourcing IT application management rather than outsourcing application development.

Application development still remains the most popular form of IT outsourcing, according to a recent survey on IT outsourcing by Computer Economics, which earlier this year interviewed more than 200 U.S. and Canadian companies to find out where their outsourcing dollars were going. But that usage has fallen almost 40% since 2007, when 52% of companies surveyed were outsourcing some or all of their application development, compared with 33% today.

Some of that drop can be attributed to companies delaying projects due to the recession and/or hiring contractors for in-house project work instead of outsourcing. In "The State of Enterprise IT Services: 2009," a recent study from Forrester Research Inc., 38% of 659 firms said they will either outsource custom application design and development or hire a consultant to do that work in the next year.

"I think a lot of project work, which is the development stuff, is what's dried up," said John McCarthy, a Forrester analyst and co-author of the study. "I think [companies] are outsourcing maintenance and bringing people in to do some of the in-house developing -- they're doing it as more of a project, and running it themselves."

McCarthy predicted that companies will increasingly turn to managed services as they replace older systems with more cost-effective solutions.

"By the latter half of next year, organizations [will say] it's not in their best interests to be trying to run all of these old systems anymore," McCarthy said. "They're going to have to have the courage to do some rationalization, cut some [systems] and then outsource the maintenance of those [remaining services] in a managed services environment."

The Forrester study also reports that 38% of surveyed firms outsourced maintenance of packaged applications in the past year, an increase of 11 percentage points from the year before.

"Going forward, I think next year is going to be a tougher year for organizations," McCarthy said. "There's still going to be pressure on IT budgets, but the business also has to go to Wall Street … and show growth."

The state of application management and development
Forrester Research Inc.'s survey results on management services (659 responses) and application development (720 responses):
Currently outsourcing: 37%
Will outsource in next 12 months: 7%
Interested/considering: 17%
Not outsourcing or N/A: 36%
Project already under way: 24%
Will hire a consultant in next 12 months: 14%
Interested/considering: 21%
Not interested or N/A: 37%
Source: Forrester Research Inc. ("Don't know" responses not shown.)

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