Tuesday, March 30, 2004

IT job turnaround could spell strategic change for outsourcing providers

The outsourcing sector has been one of a very few bright spots in the IT industry over the past two years, showing slow growth while the rest of the market continued a prolonged tailspin. New projections on IT employment, however, suggest that the tailspin might soon level off.

According to research published last week by the AEA, formerly known as the American Electronics Association, the free-fall of IT industry employment is finally slowing. After losing some 540,000 jobs between 2001 and 2002, the AEA projects that 2003 job losses will be around 234,000, approximately 57% fewer than the year before

What's more, AEA researchers are predicting that the IT industry is gearing up for a turnaround. There is a strong possibility that the sector will actually add jobs in the second half of 2004, they said.

The AEA's predictions are supported by other researchers. IDC is projecting that IT spending in the U.S. will increase 1.5% this year over last year to $372 billion. Over the next five years, spending is expected to increase at a slow compound annual growth rate of 4.9%, reaching $467 billion by 2007, the research firm said.

For outsourcing providers, the slowdown in IT job losses is both good news and bad news. The good news is that IT spending is slowly coming around, and that there will be more funds available for IT projects in the coming months, many of which will be out-tasked to third parties.

The bad news is that it may not be long before companies begin to staff up their internal IT organizations again. Thanks to the economic slump, there is a large pool of unemployed skills on the market, and enterprises that loosen their purse strings can expect to get top-flight talent at a reasonable price. Many of the skills offered by outsourcing providers can now be found on the wide-open employment market.

How will outsourcing providers respond to the resurgence in internal IT employment? Many will look for ways to hold onto current clients, either by renegotiating their terms or by building closer relationships with the IT departments they serve. If an enterprise is happy with its IT performance, and the way its operation works, it will be less likely to seek a return to an internally-staffed model.

Some outsourcing providers will look to re-establish their role as strategic consultants, rather than operational manpower. Before the downturn, many outsourcing providers were called in to help with transitional projects - consolidation of applications, deployment of new technology, or re-engineering of business processes - rather than substitute for internal operations staff. If the internal staffing problem becomes less of an issue, then outsourcing providers can move back to helping with strategic projects.

Finally, some outsourcing providers will look to provide a less expensive alternative to internal staffing. Much has been said recently about offshore IT outsourcing, and this trend is not likely to slow down. If outsourcing providers can deliver lower-cost IT services by shipping them overseas, then many enterprises will take advantage of them, possibly to the detriment of unemployed IT workers in the U.S.

Whatever the impact of the IT hiring turnaround, it is clear that the outsourcing market will look very different by the end of 2004 than it does today. The key for outsourcing providers will be to monitor the shift and respond in ways that will enable them to continue to grow, even as the internal IT organization grows.