An economic slowdown in the US is causing companies to postpone IT investments, lead ing to a decrease in overall IT services spending. The market for consulting, systems integration and IT education and training is likely to be the most visibly hit by the downturn. However, as companies postpone new hardware and software purchases, the need to maintain existing assets becomes crucial. Maintenance services, therefore, are likely to not just remain unaffected, but actually get a boost, with the market for outsourcing services remaining stable.

There are two reasons for this:-

• Large outsourcing contracts being signed worldwide are for long periods of time. This insulates them from the effects of an economic slowdown as the expenses involved in bringing the outsourced process or function back inhouse is higher than continuing with the existing arrangement

• Two of the major drivers of outsourcing—lower costs and enhanced focus on core competencies—have greater relevance during an economic slowdown. Outsourcing is an excellent option for companies when dealing with the business pressures that are brought on by a slowdown and the resulting squeeze on profit margins.

West Europe: Motoring mega deals

This is a key market that Indian companies need to look at closely, especially as figures clearly show that IT outsourcing is continuing to grow in this region. Also, the fundamentals and sentiment in the UK, Sweden and the Netherlands largely drive the market. Consider this—in the third quarter of 2000, as many as 40 deals were signed western Europe, netting $11.5 billion.

Mega deals continue to be signed at an increasing rate in Europe, many being renewals and extensions. Customers, of late, have been increasingly seeking strategic consulting as a part of their outsourcing contracts. So what are the factors driving this? First and most important is the overall confidence in the outsourcing process. Another reason that western European companies are embracing outsourcing is their desire to remain competitive with rivals in the US who have taken to outsourcing and transitioning to e-governance. Also, the European market itself is getting to be far more competitive.

As a result, corporate customers are looking to focus on core competencies...and outsourcing is being increasingly accepted in Germany, France and Italy.

Dot-coms might have come and gone, leaving little trace except that of devastation, but the importance of the Internet in business is a fundamental reality that has changed the pace of business. The Internet and its reach increased pressure on large companies to transition to new economy business practices and infrastructure.

What are the ground realities? IBM Global Services and EDS are the Big Two in the western European sweepstakes. Other vendors who have played a part in mega deals over the past five years are Andersen Consulting, Computer Science Corporation, ICL, Nortel, Origin, Perot Systems and Siemens Business Services. Indian companies like Tata Consultancy Services, NIIT and BFL Software are also consortium players.

Consortiums and multi-vendor contracts

Needless to say, these are what are becoming increasingly popular. In a recent interesting development, end-users with existing services contracts were also found appointing larger IS contractors to manage other service providers and suppliers. Examples of this are Andersen Consulting and CSC with the Saintsbury’s and Whitebread deals, respectively.

This is a great opportunity for Indian companies to become service providers and play a part in the consortiums.

Another emerging trend is that IT outsourcing contracts are including more and more services. During the first half of last year, Internet services and certain kinds of e-business integration services were increasingly being included in outsourcing arrangements. Now, deals are increasingly including an e-business consultancy portion to help clients map out a strategy to navigate the new economy.

Applications outsourcing will also be a strong opportunity area. A major force driving the application space is the transition to a new generation e-business applications and strategy. About 20% of all outsourcing contracts were pure application outsourcing contracts.

Japan: Asian opportunity

From a geographic perspective, Japan is a market that we need to be bullish on insofar as IT outsourcing is concerned. As companies are looking to reduce the total cost of systems management, outsourcing is growing. The outsourcing market in Japan is driven by the need to cut costs and the need for Japanese corporations to increase business efficiency in order to compete with global corporations. Large global corporations are the main consumers of outsourcing services in Japan. Recession has not prevented large global outsourcers from pursuing the Japanese market, and the slowing global economy should have little further impact on outsourcing in Japan.

IBM Global Services is the leader in this market— very successful. However, other vendors like Fujitsu, NEC and Hitachi closely follow IBM Global Services. They are offering a number of services like systems management, resource outsourcing, facility outsourcing, and help-desk outsourcing. Although the outsourcing market is still small, it is growing fast and true, and mid-sized service vendors are aggressively focusing on this service segment. HCL Infosystems is also focusing on this market.