IT Budgets Increasing; Outsourcing Doesn’t Keep Pace

September 15, 2014 Dan Burger

I was surprised to hear that companies are increasingly inclined to invest in internal IT operations, including hiring more permanent staff, than to outsource tasks to off-premise providers. This information comes in the form of a survey and study conducted by Computer Economics, a company well known for its analysis of the IT industry. When comparing outsourcing as a percentage of IT budgets, 2014 shows a lower percentage than any of the past five years. Spending on outsourcing is averaging 10.2 percent of total IT spending this year. That’s a slim decline from 10.6 percent in 2013 and a more weighty change from 2012 when it was measured at 11.9 percent of the total IT budget.

When examining specific IT functions within the 2014 time frame, Computer Economics reports fewer organizations are outsourcing help desk, desktop support, and application maintenance functions. Trends in outsourcing functions such as data center, application development, database administration, network operations, and disaster recovery are classified as being unchanged from a year ago.

Money spent on outsourcing is trending toward areas such as IT security work, Web operations, and software-as-a-service (SaaS).

The research company is also reporting the median IT operating budget has increased 2.4 percent in 2014.

“From a broad perspective, the most likely explanation for the downward tilt in outsourcing as a percentage of the total IT spending is the ongoing economic recovery,” said John Longwell, vice president of research for Computer Economics, who also noted IT outsourcing budgets are not necessarily shrinking so much as IT budgets are rising.

The analysis shows IT organizations are putting resources into internal operations at a pace that is greater than their spending with IT service providers.

Several findings from Computer Economics’ IT Outsourcing Statistics study provide interesting glimpses into IT inclinations. For instance, large organizations are spending 7.4 percent of their IT budgets on outsourcing at the median, compared with 6.1 percent for small organizations and 4.6 percent for midsize organizations.

Application hosting is the most frequently outsourced function in the study, and the fastest-growing type of outsourcing. The growing acceptance of software as a service gets most of the credit for this.

The outsourcing of disaster recovery, Web/e-commerce, data center operations, and network operations are identified as the functions delivering the best value in terms of saving money and improving service levels.

Organizations delegate business processes to outsourcing companies, such as managed service providers (MSPs) because they expect benefits related to decreasing their in-house labor costs and improving the quality of the outsourced item because the provider has core competencies (a knowledge base) in the chosen field, which also allows them to deliver faster service and more innovation. They view it as a better return on investment than the in-house option.

Disadvantages are not absent from this discussion. At the top of the list is the much-feared loss of control over the outsourced business processes, which, under the worst-case scenario, results in a decrease in the quality of a product or service and an angry customer contingent. Unrealistically high expectations that cannot be met are a malady in outsourcing, just as they sometimes are with in-house projects. There’s no known immunity for this. Employee morale can also be adversely affected by outsourcing decisions.

In the full study, which Computer Economics sells on its website, the outsourcing activity for eleven IT functions is inspected and interpreted. Those functions include: application development, application hosting, application maintenance, data center operations, database administration, desktop support, disaster recovery services, help desk services, IT security, network operations, and Web/e-commerce systems.