Untapped Market Potential Exists for IT Services Outsourcing (Executive Summary) Executive Summary

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1 Untapped Market Potential Exists for IT Services Outsourcing (Executive Summary) Executive Summary Publication Date: September 27, 2002

2 Author Allie Young This document has been published to the following Cluster codes: ITSV-WW-EX-0199 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2002 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice

3 Untapped Market Potential Exists for IT Services Outsourcing (Executive Summary) Introduction Although the overall IT services market has slowed considerably since the hyperactive e-business period of the late 1990s, one sector has been relatively stable and maintained its steady state value proposition outsourcing. In Gartner Dataquest IT services forecasts, outsourcing is composed primarily of IT management services and business process and transaction management services. These have proved to be the one bright spot in the IT services market because it offers a compelling business value proposition for enterprises as a means to gain operational efficiency, focus on core expertise, improve efficiencies, and potentially reduce IT costs. The predictability of the outsourcing value proposition has led many to repeat the familiar saying: Outsourcing is "good in good times, good in bad times." Some observers might add, "almost as good" (in bad times), since even outsourcers have reported different buying behavior in outsourcing today, with lengthened sales cycles and delayed decisions. This research focuses on the management services component of outsourcing. This year's data again reveal certain patterns that lead us to make the following conclusions: Overall, fewer clients tend to outsource IT services than manage them with in-house staffs, but those that do outsource report high satisfaction, and many plan to increase their level of outsourcing in the future. Of those companies that do not outsource today, a healthy opportunity presents itself among those enterprise clients that plan to outsource in the future. Outsourcing is a vehicle through which other services are often purchased in abundledfashion. Gartner Dataquest believes that there is still tremendous untapped market potential for IT services vendors in the area of outsourced managed services. Furthermore, there are expanded opportunities in the outsourcing market in terms of new services on clients' lists to outsource: Web services, ASP and server hosting via Internet data centers, to name a few. Some of these services show the highest uptake in terms of current outsourcing. As a point of reference, Gartner Dataquest has adjusted its IT services market forecasts for 2001 and beyond (please refer to "Sobering Times: Worldwide IT Services Spring 2002 Forecast Update," ITSV-WW-DA-0137). Although growth rates in IT management have slowed, IT management is enjoying relatively healthy growth during this economic downturn because of emphasis on cost reduction and efficiency enhancement both drivers to outsource. IT management is expected to reach $140.6 billion worldwide in 2005, an 8.4 percent CAGR for the five-year forecast period; this is the highest growth rate of all IT services segments with the exception of business process and transaction management services, which will grow at a 9.1 percent CAGR (see "Outsourcing Forecast Update: Feeling the Pain," ITOU-WW-FR-0106). IT services companies and outsourcers with a thorough understanding of customers' service needs, buying criteria and business requirements have an advantage in positioning their services to the market and becoming market leaders. This document offers a comprehensive view as it is based on the results of more than 320 respondents who are influential in the outsourcing decision process in enterprises Gartner, Inc. 1

4 2 Untapped Market Potential Exists for IT Services Outsourcing (Executive Summary) Key Findings and Highlights The following are some of the key findings from this report: For all respondents, the most highly outsourced services today are Web hosting, hardware and software technical support (which are often bundled with other services in outsourcing contracts) and server/midrange server outsourcing. Of those respondents who are outsourcing, the greatest increase in level of outsourcing will be for applications/solutions management, server hosting (via Internet data centers) and applications hosting (ASP model). Across all services, 54 percent of respondents expect cost savings as part of their outsourcing. The highest percentage of respondents expecting savings are in server hosting (via Internet data centers) and desktop operations/ management outsourcing, with 77 percent and 71 percent, respectively, of respondents anticipating savings. Overall, the median cost reduction goal (as a percentage of total outsourcing cost) is 23.2 percent. The average mean satisfaction rating for all 15 management services is 4.9 (on a 7-point scale, with 7 being extremely satisfied). Users report highest satisfaction levels with data center mainframe/supercomputer and network operations/management, both having a mean satisfaction rating of 5.3. Overall, access to critical technical skill sets is identified as the top driver to outsource followed by enhancing business performance or competitiveness, while the greatest number of respondents identify higher than expected costs and loss of in-house IT expertise as the greatest inhibitors to outsourcing. Overall, the most important attribute in the vendor selection process is the vendor's ability to deliver on-time/on-budget service innovation; the second most important attribute is the ability to deliver business-based results. Gartner Dataquest Recommendations Although most customers continue to meet their IT services needs using inhouse resources, Gartner Dataquest research shows that more customers are willing to consider the outsourcing option today than in the past. The following Gartner Dataquest recommendations are for outsourcers/it services vendors pursuing outsourcing of management services: Take advantage of the positive outsourcing cycle to expand your market position and brand value. Current outsourcing customers are the prime target for growth and expansion of opportunity; they not only are satisfied today but show high willingness to increase their level of outsourcing in the future. Vendors must align their value propositions and their sales/marketing strategies with key buyer values for specific outsourced management services. Consider expansion of your outsourcing portfolio to include new utility-based management services; there is a strong demand for emerging utilitylike services that rely on network-based delivery of an outsourced solutions: Web hosting, server hosting (via Internet data centers) and application hosting Gartner, Inc. September 27, 2002

5 Untapped Market Potential Exists for IT Services Outsourcing (Executive Summary) 3 The most effective external reference source for selecting an outsourcing partner is word-of-mouth recommendations from industry peers and an outsourcer's brand or reputation in market. Consider every customer to be a potential reference account. Outsourcers must pay attention to issues of trust, ethics, and delivering on their promise to solidify how they are viewed in the market. For the full report, see the Gartner Dataquest User Wants and Needs "Untapped Market Potential Exists for IT Services Outsourcing" (ITOU-WW-UW-0103) Gartner, Inc. September 27, 2002