Outsourcing is in, says Holway

The 14th annual Holway Report on the UK software and IT services industry, released this week, should give business pause for thought.

Although software vendors are having a tough time, users are still confidently spending on service providers and outsourcing. The report shows the value of new outsourcing deals more than doubled between 1999 and 2000, from £713 million to £1.8 billion.

Spending, particularly on very large contracts, was highest in the private sector. Ovum Holway reports that EDS boasted a 33% increase in outsourcing revenue to £1.8 billion last year, including a £1.3 billion outsourcing deal with car manufacturer Rolls Royce. IBM also managed impressive revenue growth of 21% on year.

Outsourcing was the fastest-growing European software and services sector last year. Spending in the sector grew by almost 15 per cent, compared with five per cent for the second fastest-growing sector, application software products and solutions. By 2004, Holway says outsourcing will account for nearly 30 per cent of the European software and services sector.

The rebirth of outsourcing

The Holway Report is the latest in a long line of research to find that outsourcing is enjoying a renaissance. A report from analyst Giga Information Group found that the number of large multinationals using outsourcing had risen from 80 per cent to 92% during the last two years.

Increased spending on IT outsourcing will be instrumental in driving an average annual growth rate of 19% for the professional services industry over the next three years, says analyst Gartner.

A good deal of outsourcing

All the evidence suggests that the figures for next year's Holway Report will be equally kind to outsourcing. In the first half of 2001, there has been a series of mammoth outsourcing deals, such as pharmaceutical company AstraZeneca's decision to outsource IT operations across 45 countries to IBM Global Services. The seven-year contract is worth $1.7 billion.

Airline BMI, formerly known as British Midland, outsourced its reservation system to fellow airline Lufthansa, while transferring its desktop and mid-range systems to service provider ICL.

The ICL transfer is the second phase of a £30 million deal, signed last year, which has seen BMI hand over the running of its mainframes and its service desk.

Telecommunications provider NTL recently announced it was going to outsource its IT operations, including billing, customer care and helpdesk, to IBM.

Under the terms of a 12-year deal worth about £1.3 billion, 400 workers have transferred to IBM.

"We wanted to focus on what was core to NTL," said IT director Chris Reveley. "The back office isn't core business. We want to concentrate on the cables, telephony and interactive TV."

Spending slowdown, revenue slide

While the outlook is rosy for outsourcers, it's a different situation for the rest of the industry. Facing an impending economic downturn, organisations are reining in spending, with the result that IT service provider revenues have been hit hard.

The growth of the UK software and IT services sector fell from 15% in 1999 to just 9.5% last year. Profits were heavily hit, falling a massive 86% during 2000.

Overall, the growth of the software and services sector will slow from 2000 to 2004, says Holway, with average growth rates of 13.8%. In the UK, Holway expects the sector to grow by just 12% over the next three years.

That's likely to hit suppliers hard. Some 58% of the companies surveyed by Holway reported a drop in performance in 2000, with 38% of the suppliers reporting financial losses.

Nearly three-quarters of the UK companies reported losses or reduced profits last year.