Ovum reveals process optimization and shared services now take priority over outsourcing as IT battles the headwinds of recession.

Global outsourcing market revenue will grow just four percent by 2014, predicts Ovum, reaffirming the view that outsourcing is no longer perceived as the main tool that IT has to fend off the recession. Instead, process optimization and shared services are now regarded as higher priorities. Meanwhile, the crucial market over the next 18 months will be the US, but the current “fiscal cliff” negotiations will add significant complexity to the challenges already facing the outsourcing sector, claims the global analyst firm.

In a new report* Ovum suggests that renegotiations and restructurings will be a key characteristic of the future of the global outsourcing market, which will see $146bn worth of contracts expire by the end of 2014. The industry analysts expect to see an acceleration of multi-sourcing and smaller contract sizes. Cloud services will lead to an extension of the market in terms of activity, but this will put pressure on provider earnings.

“Despite all the negative headlines around the sharply declining total contract value (TCV) of publicly announced contracts, culminating in some commentators insinuating the death of outsourcing, we believe that outsourcing will continue to remain a strategic management tool,” says Thomas Reuner, principal analyst at Ovum (in picture). “However, there are fundamental challenges ahead especially in the US and UK public sector after the upheaval brought about by the financial crisis.”

In the US, Ovum expects the combination of $92.3bn worth of expiring contracts and demand moving to more lead generation projects to provide a strong stimulus for the outsourcing sector. This scenario will be a litmus test for the legacy providers such as IBM, HP, and CSC which, given the increasing adoption of multi-sourcing and lower barriers to entry, are clearly exposed. Meanwhile, demand in Europe will remain subdued as the key UK public sector undergoes reform of its procurement processes and the Eurozone remains volatile.

The strongest expansion of scope will occur in application management and F&A BPO, says Reuner: “While infrastructure will continue to show subdued growth, we expect significantly stronger growth in BPO as the offerings are maturing and more and more projects become process-led. Nonetheless, the underlying dynamic is a shift toward incremental, short-term quick wins. It is here where cloud services or platform plays can provide a crucial lever.”

*Outlook for the Global Outsourcing Market at the Tail End of the Financial Crisis