DACH IT Outsourcing Markets - Industry Tendencies For 2007

Throughout 2007, the information technology and telecommunication market in EU-countries is expected to demonstrate 2,9 % increase (668 billion Euro value) as compared to the previous year. This data is verified by BITKOM (German Association for Information Technology,

Telecommunications and New Media e.V.) and recent research by European Information Technology Observatory (EITO). Dr. Bernhard Rohleder, CEO for BITKOM forecasts positive market dynamics for 2008 at the same growth margins. The guiding industry segments encompass Software (6,5% per cent growth) and IT Services (5,5% growth).

When supply meets demand: the case of IT outsourcing

Nearly two thirds of the interviewed firms declared their intent to employ extra personnel in 2007. In this sense, the shortage of the highly qualified IT resources is being considered as a substantial challenge to the long-continued development of the information technology industry. As far back as in 2004, Gartner consultants estimated that before 2010 up to 25% of the traditional IT jobs in the Europe will be outsourced to more cost-effective locations. However, taking into consideration the current outsourcing growth rates, the quantitative dimension of this trend will be even more impressive.

According to BITKOM research, 43 per cent of German IT-firms experience problems with staffing. During the coming years this trend will become even more visible due to demographic decline, shortage of highly qualified personnel and yet good IT market opportunities. Approximately 20,000 job positions in German IT sector are currently unoccupied. Most popular job offerings include well-trained software developers, IT project managers and IT consultants.

At the same time, the growing demand in the IT personnel market brings about corresponding proposition from the foreign outsourcing vendors and consequently toughens the competition among the IT providers from abroad. Approximately 58% of the Schwartz Public Relations interviews have expressed their willingness to outsource the activities associated with IT Services domain to nearshore and offshore locations like CEE, China and India. Unlike the nearshore competitors, Indian IT-specialists are unwilling neither to work on onshore contracts nor apply for German Green Card.

IT outsourcing: attractions and concerns

As outlined in recent publication in CIO magazine, the main driving force behind outsourcing remains cost reduction, this aspect gains additional significance for larger enterprises. Additional reasons for outsourcing encompass betterment of services, achieving flexibility and conformity to industry standards.

Judging from the outcomes of CIO-Online Survey, 77 per cent of the interviewees outline loss of know-how as the major risk of outsourcing. It has demonstrated visible opinion shift as compared to 2005 poll: professional know-how loss constituted significant concern "only" to 36 per cent of surveyed professionals, while inappropriate quality caused substantial problems to 48 % of the interviewees. Additional arguments against outsourcing included overwhelming dependence from the provider, loss of primary competence, security issues and lack of adaptable processes. overhead, non-transparent business models and failing to meet deadlines.

Wolfgang Janko, Austrian IT industry expert mentions that the first and foremost rule of outsourcing is: "never to outsource the IT services, which constitute the core competence of the enterprise. It is the mistake that has been executed by nearly 60% of the surveyed companies".

However, effective risk mitigation strategies along with carefully examined and mutually agreed partnership conditions are capable of minimizing the unwanted outcomes of outsourcing.

Swiss outsourcing times: mega-deals left behind

The analysts from Active Sourcing estimate the overall Swiss IT outsourcing market volume in nearly 12,9 billion Euro. The market analysis by German-French corporation PAC supposes that during 2006 - 2010 Swiss IT outsourcing market will grow at 7,5 %. The leading IT outsourcing-consumers among industry verticals include Retailing, Public Sector, Transport/Tourism, Telecommunications and Insurance. In relation to "big deals", Finance sector continues to occupy prominent positions: 84% of the IT outsourcing agreements with more than CHF 10 million total cost of contract were concluded during the last twelve months in Finance/Banking industry. The leading position at the Swiss outsourcers ranking list occupies IBM; its close competitors include Swisscom IT Services, T-Systems, EDS, HP, Accenture and CSC.

Judging from the statistical data for the beginning of 2007, the total cost of the contracts is decreasing, with the era of mega-deals switching to multitude of middle-size contracts in private sector. Over the years, SME segment is gaining increasing popularity among IT service providers. Other trend that is obviously taking place is multisourcing, selective distribution of IT tasks among diversified providers; it capacitates the minimization of client's dependence from single source of outsourced software development and occupies prominent niche within the fastest growing trends. The outsourcing clients are getting more and more equipped to manage multiple vendors simultaneously.

The IT market experiences the second wave of outsourcing, with contract renewals and greater acknowledgement of strategic partnerships being on the top of the agenda. Outsourcing providers are modifying their offerings in sense of increased client expectations and emerging new technologies. Broadly speaking, the price and service offerings of the outsourcing providers in most cases do not have tangible difference. The most important aspect remains, particularly for German-speaking market, individually tailored client approaches and working towards satisfying the needs of customer's business. As for the Swiss IT outsourcing market, nearly three fourth of all contracts with IT service providers are renewed. However, according to data publicized by Active Sourcing, during the third quarter of 2006 the newly signed contracts dominated on the market.

German outsourcing landscape: even more benefits for larger enterprises?

Throughout 2004 - 2006, the German outsourcing market has grown by 8 per cent, totalling EUR 12 billion. Starting from 2006, the market dynamics has accelerated, amounting for 11 per cent annually; the figures for 2007 are expected to reach more than 15 billion Euro. According to recent IDC investigations, its market share comprises 38%. German top IT outsourcing providers encompass IBM, Fujitsu, Hewlett-Packard, Siemens, EDS, Info AG and TDS. IT outsourcing acquires paramount importance for German enterprises: as mentioned in Meta Group market investigation, 37 % of the companies are willing to execute partial or complete outsourcing of their IT activities. Another survey by CIO.de, conducted at the end of 2006, provides clear evidences that 51% of the interviewees plan to outsource their IT activities and 15% are still undecided.

The 30 largest IT providers in Germany occupy approximately 60% of total market volume, with the rest of the numerous smaller market players: regional providers and IT branch establishments. The IT service landscape in Germany is also characterised by increasing number of mergers and acquisitions; notes of transactions interest exists both from foreign providers and German IT companies.

According to A.T. Kearney consultancy, IT providers operating in Germany could be classified as follows:

- Global Players (extensive service portfolio, min. EUR 10 billion turnover);

- Major Regionals ( broad service portfolio, regional or country-specific focus, EUR 1 - 10 mln turnover, approx. 40% foreign capital involvement);

- Indian Firms ( major focus on software services, mid-ranged service portfolio, EUR 500 mln. - 2 billion turnover);

- Captives ( branch establishments with delivery models oriented to associated company, EUR 50 mln. - 1 billion turnover, overwhelming regional course);

- Second-Tier ( regional firms, up to EUR 500 mln. Turnover, specific service focus).

The 'big deals' pattern on the German market much resembles the Swiss one: multi-million contracts are becoming a rare case, with the projection of turning into exception in the nearest future. Selective outsourcing is gaining more and more popularity, involving partial infrastructure components or certain business processes. The substantial number of industry players from Finance, Telecommunication, Media and Insurance verticals outsource their IT processes to external vendors. Another interesting note: the bigger the company, the greater emphasis is laid upon outsourcing: Meta Group survey results for companies that employ more than 5,000 staff members testify that 46% of the corporations take advantage of complete or partial outsourcing.

In outsourcing of applications the lead take ERP programs (especially SAP), another 12 per cent occupy CRM-applications and branch-specific solutions. The prominent role in German IT market plays offshore outsourcing, besides Indian subcontractors, the significant market share retain CEE and SEE outsourcing providers, working within well-established and cost-attractive niches. The recent years have given birth to brand new models of both ITO and BPO: "Software as a Service", "On Demand Sourcing", "Dynamic Infrastructure" and "Shared Services".

Outsourcing in Austria: growth fueled by SMEs

As publicized by IDC Study, until 2010 Austrian market for information technology services will grow by 3,9 per cent. In 2006, the Austrian IT market volume has increased by 2,9 %, keeping step with EU average indicator. When evaluating rankings, the major IT service players, the lead takes Siemens Business Service, followed by Raiffeisen Informatik, iT-Austria and IBM. The most dramatic development is being demonstrated by open source and IT security services. Since 2004, the most significant IT business domain remains outsourcing (36% of market share). Siemens Study adduces new arguments for increased dynamics for IT outsourcing market in Austria. While international analysts measure the market development at 12 %, Siemens experts forecast even more rapid IT outsourcing growth. The most important IT business domain in Austria remains outsourcing with market share of 36%. While the complete outsourcing of the IT infrastructure experiences stagnation, such segments as application management along with network- and desktop-outsourcing demonstrate visible growth from 11,8 to 13,8 %.

The outsourcing clients are willing to invest in the issues with a long-term effect: service-oriented architecture, enterprise application integration and web services. Much emphasize in outsourcing services is placed upon innovation in other to beat the competition. The powerful incentive is given to industry-specific solutions. According to IT branch analyst Christiane Pütter, Austrian SMEs are making their choice in favour of ERP and CRM solutions. The efforts of IT outsourcing providers are focused on Austrian small and medium enterprises. Joachim Seidler, Branch Manager at IDC Austria notes that "nearly 60% of IT outsourcing services in Austria is delivered to SME segment". The subcontracting of IT and Telecommunication infrastructure to external providers proves to be of utmost interest to Austrian SMEs. Carlo Wolf, CEO of Cisco-Austria estimate the SME segment growth at 20% margin (overall market potential approx. 300 mln.), although this market share seems to be relatively small.

Currently, partial outsourcing is a popular trend among Austrian IT companies. Albert Felbauer, CEO for Siemens Business Services Austria, shares his industry look-out: "Nowadays Austrian enterprises, which are engaged in outsourcing relations, subcontract approx. 20 - 30% of their IT activities".

DACH outsourcing market: a look beyond

To conclude with, the IT outsourcing market in DACH-region is going through impactful transformations: mega-deals becoming a rare occasion and nearshoring and multisourcing gaining more prominent positions. The outsourcing agreements are being concluded for shorter periods, with selective outtasking becoming a viable trend.

While the IT budgets within the companies are not substantially pushed up, the IT analysts anticipate stable outsourcing market growth (7 - 10 %) in the years to come. Branch-specific services are winning dominant market share, with Finance/Banking solutions taking the lead. The new outsourcing era will be marked by the powerful wave of merges and acquisitions, especially among CEE outsourcing providers and DACH IT corporations. SME market, including start-ups, would also generate constantly growing demand for outsourcing services, toughening competition between outsourcing multinationals and nearshore providers.

How Outsourcing Jobs Can Be Profitable

Outsourcing has become a very popular alternative for a number of very valid reasons. Outsourcing initially emerged as a way for companies to cut costs by having processes such as manufacturing and assembly done in overseas locations where costs were much lower. Lower wages and operating costs both contributed to these reduced costs. These lower costs were appealing because they greatly improved the profit margins for the companies.

However, outsourcing is now gaining in popularity for a variety of other reasons. While cost reduction is still a primary advantage, other elements such as access to industry experts, a larger workforce and more flexible options are being embraced as welcomed advantages offered by outsourcing.

The cost of outsourcing is usually higher in terms of the hourly rate of the employee but overall the costs may be reduced. When considering work performed by in-house employees it is important to realize the cost of the work includes the employee's hourly rate, the cost of benefits such as social security, Medicare and workers' compensation and resources such as office space, hardware, office supplies and other incidentals. After factoring in all of these costs it becomes clear that outsourcing isn't always the more expensive option.

Still another advantage to outsourcing is the benefit of enjoying a larger workforce when necessary without the hassle of maintaining a larger staff. Through outsourcing companies can bring in additional employees on a contract basis during times of prosperity without worrying about having to lay them off or keep them utilized when the surge of work begins to wane. This is particularly relevant in industries which enjoy peak seasons as well as off seasons.

The flexibility outsourcing provides also allows companies to afford the luxury of allowing their employees to participate in important training classes. This is an important issue because while training and continuing education does make employees more marketable, it also costs the company in terms of productivity because the employees are not profitable during the course of their training. However, if companies are outsourcing some of their software jobs while some of their in-house employees are in training classes, the company gets the benefit of more knowledgeable employees without having to pass on potentially profitable endeavors in the employee's absence.

Combined with the reduced operating costs, many companies find that productivity is increased through outsourcing. By outsourcing work to qualified individuals, the in-house employees are freed of additional responsibilities and can focus exclusively on the tasks they were hired to perform. This is significant because without outsourcing these same employees might be tasked with attempting to perform complicated tasks for which they are not properly trained or qualified. When this happens there is a significant decline in productivity as the employees take longer than necessary to complete the more complicated tasks and do not have time to complete the simpler tasks.

In addition to the flexibility issues described above, outsourcing has the added bonus of essentially increasing a company's manpower making them more appealing to potential clients. While there are always going to be some potential clients who are drawn to the appeal of a smaller company, the vast majority would prefer dealing with a larger company that has the manpower necessary to meet all of their complex needs. Outsourcing gives a company the luxury of having industry experts at their disposal without having to maintain these individuals on staff.

Finally, the benefits should be considered in deciding whether or not to outsource particular tasks. We have already touched upon some of the benefits of outsourcing but for the sake of completeness we will include a list of some of the most significant benefits below:

* Decreased labor costs

* Access to industry experts

* Flexibility in scheduling

* Increased manpower

One precaution to take when considering outsourcing is to investigate all of the costs associated with outsourcing and establish a budget for having a particular project completed as an outsourcing endeavor before beginning to search for potential candidates. Doing this will enable companies to evaluate whether or not outsourcing is a wise decision from a financial standpoint before they invest too much in the process.

How To Find Your Outsourcing Provider

Usually people decide to find outsourcing provider after understanding of advantages of IT outsourcing etc. Is there the exact way to find outsourcing provider? Is there fixed actions that will help you to find outsourcing provider, that satisfies your own needs? Even if you don’t find an answer for this questions in this article, it will help you to avoid mistakes.

The first step is to imagine ideal outsourcing provider. There is a man who has the business in software development. This man has his own receipt how to find outsourcing provider. The main part of selection is checking of provider’s background.

He collects all the information about the vendor, their staff, he looks through the web-site of the company, collects all the preferences form the previous clients, checks all the trade marks. It seems a little bit funny for people, but this businessman is very successful in searching of outsourcing provider.

There is another story, about the man, who had really successful business, but he become bankrupt in a moment. He was told that his Manager on Technology had Doctor’s degree in physics, but it appeared that he hadn’t even graduated. He was told that earlier his Chief Executive Officer was working in a respectable business, but it appeared that the man had realised fraudulent schemes on his previous work, and federal count had obliged him to pay $16 million of fines. The only one reason for this is that the second man has his own image of outsourcing provider in his mind which in reality is non-ideal and doesn’t fit real conditions of work.

According to this situations the conclusion may be one – to check your image of ideal outsourcing provider with real features of people.

Everybody knows about huge development of IT industry or software development. So, one of the main parts of outsourcing is IT outsourcing. In this field of activity the needs in outsourcing are really high. That’s why your chances to be deceived are also becoming higher. It would be better if you are sure that the outsourcing provider is financially secure to realise the conditions described in the contract. Take care of the vendors, who provide very cheap services.

The next point is – you are going find outsourcing provider in order to make your business larger. You should check if your outsourcing provider meets your future requirements in case your business will start to grow. If you already have outsourcing provider, that meets your requirements, but you want to enlarge you business and to find one more in order to outsource projects in another area, for example, in software development, you should make sure that the second outsourcing provider will meet this needs.

In conclusion it will be better to give the last advice – you have already found outsourcing provider, that satisfies your needs? Keep it, because nowadays it is really difficult to find good outsourcing provider. In case you think the prices of your outsourcing provider are becoming higher, you may bargain. If you are a good and honest customer, you will get the discount.
Another opportunity to get good relations with your outsourcing provider is to build partnership with them. In this case your relations with outsourcing provider will be similar to relations of barman with well-known client – as soon as he opens the door of the bar, the barman is preparing his favourite cocktail.