ICT Industry in Europe. Outsourcing Fuels Business Growth 1
CONTENTS Introduction... 3 Implications of owning own IT infrastructure Drivers to outsourcing IT nearshoring to pick up in 2014 Risks of outsourcing Top IT outsourcing destination selection criteria Benefits Future trends Trends for outsourcing Conclusions Introduction The Information and Communications Technologies (ICT) sector is one of the most dynamic in Europe. Approximately 5.3 million people in the EU are employed in ICT jobs, in a market worth more than 670 billion. The largest ICT markets are Germany, the UK, and France. But the division ranges at ICT product level. The largest software market is France, while Spain is the largest market for communications equipment. 10 About INP-Software LIST OF REFERENCES... Country profile 2
European markets currently allocate their IT budgets across the core areas of the market, namely hardware, software, IT services. Western European enterprises are heavily focused on increasing their profitability given that the tough market conditions often make it hard to achieve revenue growth. Consequently, IT decision makers in the region place a high degree of importance on the business objectives of raising efficiency and cutting costs. 10 Implications of owning own IT infrastructure According to 2013 EMEA IT Leadership Report, over the next 12 months CIOs in Europe need to facilitate some critical goals: to do more with less budget (mostly cited by the UK respondents 45%) and overcome shortage of IT staff (prevailed by responders in Germany 31%). Looking back over the past years, IT leaders have reported that they regret over some IT decisions, specifically, purchasing IT assets, that turned out to higher costs and wasted resources. However, European CIOs tend to lag behind their counterparts in the U.S. 3 Organizations who agree that they have IT equipment they now regret purchasing. 3
Given the number of benefits, it is not surprising that within five years IT leaders expect a huge 40% of their infrastructure will be outsourced, a global average rise of 15% from 25%, that is currently outsourced now. Organizations in Finland, Spain and the UK outsource services to external service providers more often than other countries. In these countries, the highest percentage of outsourcing is seen in IT services, such as application development, IT helpdesk, infrastructure and testing, but also payroll services 1. Drivers to outsourcing As competition within Europe continues to rise, companies are increasingly more open to outsourcing as a valid means of cost reduction, particularly with regard to IT and business processes. In 2013 the main reasons for outsourcing were cost reduction (42%), followed by efficiency improvement and a greater focus on core business. Access to specific knowledge and expertise was a key benefit in Norway, Sweden and the UK. 1 Furthermore, certain industry sectors are more willing to outsource than others, and there is a mixed picture concerning the desirability of onshore, nearshore and offshore service provider locations. Approximately three quarters of IT services remain in-house, indicating that 4
even a mature market, such as ITO, demonstrates large potential for growth in the coming years. 1 nearshoring is the transfer IT processes to companies in a nearby country, typically with the same, or close time zone. Location of outsourced services per country IT nearshoring to pick up in 2014 The latest IT Sourcing surveys demonstrate that the majority of enterprises in the EU would transfer their IT support/development nearshore rather than offshore, if they make such a decision in the near future. This tendency is predicted to be the leading one for the next 5 years. In 2013 the majority of companies 85.6% (64% in 2012) preferred nearshore locations for the outsourcing budget allocated within Europe. 4 In contrast to offshoring, Poor communication with vendor s team as a result of cultural and linguistic differences were named by CIOs as the main barriers to outsourcing. That s why nearshoring has a lot of benefits and is going to stay the most popular ITO destination, followed by onshore outsourcing. When organizations decide to offshore processes they often omit researching the local culture and understanding how to bridge cultural differences, and only a small number of companies implement mitigating activities to reduce the risk of dependency. Although organizations 5
face many risks overall when outsourcing services, they are capable of managing them, as they continue to outsource. Risks of outsourcing The perception of dependency on the external service provider is often seen as an important risk for organizations 1. CIOs also name contractual obligations are the main barrier to outsourcing, while in the UK company culture combined with an unwillingness to relinquish control were the main inhibitors. In particular, heads of IT in public healthcare and the software industries are most likely to decline outsourcing because they feel more in control if they manage the infrastructure themselves. 3 Top IT outsourcing destination selection criteria The most decisive factors in the choice of ITO destination among European organizations are vast pool of IT talent with an excellent command in foreign languages (e.g. English) and cultural similarity. 6 When choosing their ITO hubs, the UK and Swedish companies also make sure of the economic and political stability 7, while low costs is also among top three factors in the choice of an ITO partner for CIOs in Germany and Norway. 6
Benefits Globally, CIOs told that the top three benefits of outsourcing, a utility based model in particular, are cost reduction and containment (39%), infrastructure scalability and flexibility (39%) and improved quality of service (37 %). However, the benefits are perceived differently around the world, with 39 % of IT leaders in the UK saying that cost reduction and containment is a benefit, compared to 32% in Germany. 3 Overall, the service provider community showed strong satisfaction performance with 87% satisfied with their outsourcing contract in 2013. 78% of companies would continue to outsource more while another 36% indicated that there would be no change in their outsourcing activities. 9 7
Future trends It is clear that internal and external staffing will remain the largest component of IT budgets (53.5% globally). This trend is visible since 2009. In 2009 in-house staff counted 39% of the IT budget; but now projected to be 29.1% in 2014. Also in-house hardware/software infrastructure started at a higher percent of 33% in 2009 and projected to be 26.3% in 2014 4. Since the budget for IT staffing is decreasing from 67.0% in 2009 to 53.5% in 2014, IT leaders expect to outsource 70% of their IT infrastructure by 2018. 5 PAC revealed that 36% of European businesses will spend more on digital transformation in 2014 than in 2013. It also revealed that 48% will spend more on mobile devices and applications, and 37% will spend more on business intelligence software. By market segment, the researcher expects strength in SaaS, mobile, big data and smart apps to streamline business processes. Prediction of outsourcing market per country Forrester Research expects Europe the market growth will be strongest in Scandinavia, the UK, Ireland and Poland, with estimated increases of around 3%. Markets such as Germany, France, Belgium, Switzerland and Austria will grow a more modest 1.5-2.5%. A strong growth in Latin America and Eastern Europe is also predicted. Trends for outsourcing For 2014 it is estimated that outsourced IT services will increase both domestically as well as offshore. 8
The outsourcing market is changing as many companies now consider value to be measured less by costs saved, and more heavily based on agility and the quality of service delivery. This is increasing the pressure on outsourcers to find innovative ways of delivering value to clients, while ensuring that contract requirements are maintained 11. IDC study identifies that 2014 seems to be shaping up as the year in which the traditional outsourcers will need a dual strategy of protecting their installed customer base and deals while also elevating strategic investments in new delivery models from cloud services to platform-based capabilities that will require restructuring of existing business models, service portfolios and talent. CONCLUSION More than in many other sectors of the economy, the IT industry is constantly under the pressure of change, innovation, growth, emerging technologies and new business models. While the expected recovery from the recession presents new challenges and opportunities for European IT market in 2014 and 2015, IT executives are set to leverage both global and local IT opportunities (such as increased spending and hiring, business intelligence, virtualization, and outsourcing) to overcome not only global challenges but also local IT and business challenges. 4 Outsourcing services in 2014 are expected to grow, driven mostly by hosting infrastructure services and hosted application management services. Nearshore is the most preferred ITO destination among European countries, and this tendency is predicted to be the leading one for the next 5 years. At INP-Software, outsourcing is at the heart of what we do for partners. With our best-of-breed IT services and software solutions we promote business agility, provide 9
transparency and control over IT cost models; and maximize the adaptability of IT operations across a broad portfolio of IT services. About INP-Software INP-Software is dynamically growing Ukrainian IT offshoring company providing full cycle software and web development services. Having more than 7 years of experience the company has successfully cooperated with American, German, British, Israel, Belgian, Dutch, French, Russian and other companies. Our services: - Application Development - Enterprise Solution Development - Web Development and Design - Mobile Development - Quality Assurance & Testing Services - Software Migration - Re-Engineering & Optimization Choosing INP Software you can focus on your core business while delegating time consuming processes to our talented team of developers, QA engineers and managers. Our mission is to accelerate your business! 10
Resources Contact details: INP-Software 64 Dovzhenko str, Zhytomyr, Ukraine. Tel.: Email: Web: http://www.inp-software.com Follow us 1. EY, 2013 Outsourcing in Europe. An in-depth review of drivers, risks and trends in the European outsourcing market. 2. Schlack, M. (2014). 2014 Priorities Europe. TechTarget Retrieved from http://book.itep.ru/depository/forecasts/2014_priorities _Europe.pdf 3. Savvis.(2013) EMEA IT Leadership Report IT Infrastructure. 4. Derksen B., Luftman J.(2014) Global Institute for IT Management European key IT and Management Issues & Trends for 2014. Retrieved from http://blog.cionet.com/wpcontent/uploads/2014/02/ittrends_2014print.pdf 5. Global IT Trends: IT Outsourcing Fuels Business Growth(September 2013), Savvis. 6. Pan-European IT Outsourcing Intelligence Report 2011 7. European IT Outsourcing Intelligence Report: United Kingdom 2012 8. European IT Outsourcing Intelligence Report 2011: Germany 9. IT Outsourcing Study Europe 2013, Whitelane Karl Flinders, (1 December 2014), European IT market will begin slow recovery next year, computer weekly Retrieved from 11
http://www.computerweekly.com/news/2240211415/ European-IT-market-will-begin-slow-recovery-nextyear 10. ICT Investment Trends in Western Europe - Understanding ICT Spending to 2014 (July 2013), Kable Country profiles Germany 11. 2014 Global Outsourcing and Insourcing Survey results (May 2014), Deloitte Consulting LLP 12
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