2012 will bring some new IT outsourcing trends

Originally posted by Stephanie Overby, freelance writer, for CIO.com “12 IT Outsourcing Predictions for 2012“.

“In 2011, the IT outsourcing industry was marked by smaller deals, leery customers, profit-squeezed IT service providers and a lot of cloud computing talk. Much of that could continue next year, but as 12 predictions for 2012 indicate, you can expect some new IT outsourcing developments”.

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#1. 2012 Will Be a Mixed Bag of M&A Activity

“Outsourcing providers will shy away from mega-mergers,” says Phil Fersht, founder of outsourcing analyst firm HfS Research, due to a shortage of attractive second-tier providers capable of delivering more than added scale.

#2. Outsourcing Buyers Take it Slowly

That recovery we were all looking forward to in 2012? It’s delayed. Many outsourcing decisions will likewise be postponed. “Threat of recession will hold back one-in-four buyers from signing contracts until current economic uncertainty lifts,” says Fersht of HfS Research. “And a rocky economy isn’t helping drive definitive behavior, with three-quarters buyers expecting either little change in focus when it comes to outsourcing, or they simply do not know what they are going to do.”

#3. The Cloud Comes Down to Earth

The good news, says Shaw Helms, a partner at the outsourcing practice of K&L Gates, is that “by the end of 2012, the buzz around ‘cloud’ will have significantly died down.” IT leaders and managers will be looking more critically at cloud computing risks and being more critical of its value. “IT departments will no longer be getting pressure from the C-Suite to implement cloud computing without a thoughtful evaluation of the alternatives”.

#4. IT Service Buyers Look Beyond Labor Arbitrage

Outsourcing customers still want to keep costs low when they farm out IT services. But next year, they’ll want more—increased global flexibility or better technology, for example, says Fersht. The only problem is that their IT service providers will still be reading from the labor arbitrage handbook. “Providers will still be overly focused on cost reduction for their clients, as opposed to process improvement and innovation,” Fersht says.

#5. IT Outsourcing Deals Gets Small

In 2012, profit margin will trump deal size for the first time, “Service providers looking for market share are becoming increasingly willing to cannibalize their revenue by introducing pricing models based on consumption and business outcomes,” says John Lytle, consulting director for outsourcing consultancy Compass.

#6. IT Offshore Providers Take Over Infrastructure Outsourcing

Offshore service providers have been slowly but surely building the infrastructure capabilities in hopes of moving beyond application development and maintenance work. This year, that effort pays off. “2012 will see a number of companies that have relied almost exclusively on U.S.-based IT infrastructure providers continue to shift business to offshore companies,” says Steve Martin, partner with outsourcing consultancy Pace Harmon.

#7. IT Outsourcers Embrace Riskier Models

Pricing pressures will continue to squeeze provider margins, especially offshore. To support growth and profitability, vendors will have to consider innovative—and risky—engagement models such as joint ventures including customer-specific innovation labs and dedicated centers of excellence, according to Everest Group.

#8. Application Development Migrates Stateside

Financial services firms, for example, have provisioned the maintenance of scores of lines of code from offshore providers in the last decade. But in 2012, they may begin to question the offshore model. “There will be a retraction in application maintenance outsourcing going offshore as big financial services firms finally recognize how to merge quality and cost metrics,” says Michael Engel, managing partner, HfS Consulting at HfS Research.

#9. IT Security Takes Center Stage

Sometime in the next year, a large IT service provider is going to be humiliated by a public hack of a client’s systems, predicts Ruckman of Sanda Partners. “2012 will be the year of security,” he says. “Outsourcing companies are going to look for new and better ways to protect their data and their customers.