Unbundling, Pricing Sophistication, Shorter Deal Terms and Service Provider Turnover Highlight End of Labor Arbitrage as Primary Driver in AO Contracts
DALLAS, October 9, 2013 — The traditional value drivers of labor arbitrage, process efficiency, and standardization are unable to provide the next level of value in AO engagements, according to new research published by Everest Group.
Buyers are facing multiple challenges in their portfolios such as rapidly declining productivity, and service providers are unable to respond to these issues. As a result, the market is witnessing an increasing number of service providers losing their existing AO engagements.
The data are included in a new report issued by Everest Group, an advisory and research firm on global services. The report, Application Outsourcing (AO) Annual Report 2013 – Declining Productivity, Rising Anti-Incumbency, provides data on market size and share, buyer adoption trends across geography and industry, and key trends shaping the market.
Everest Group’s annual research on application outsourcing provides fact-based perspectives on buyer adoption by geography, industry, and revenue size. It analyzes major trends that are shaping the applications market and the outlook for the next year. It also sizes the IT services market in terms of application outsourcing and consulting services.
Some key highlights:
- Anti-incumbency: Buyers appeared dissatisfied with their existing AO service providers, resulting in various incumbent players being replaced
- Buyer investments: Buyers are leveraging their existing providers for next-generation services, especially mobility and cloud. Mobility accounted for more than one in five AO engagements, and about 40 percent of these engagements required delivery of social business applications. Cloud adoption appears focused more on Software-as-a-Service deployment than the transformation of existing applications.
- Productivity: More effort is required from buyers to drive AO productivity in addition to the typical strategies such as automation and provider consolidation.
- Spending: Though buyers are willing to invest in applications, they require more spending visibility. Therefore, they prefer shorter deal terms and invest more in application maintenance than custom development.
- Pricing: Buyers are now granular in pricing discussions (e.g., cost by function point). Output-based pricing rose, especially in application maintenance.
Everest Group concludes that buyers will be willing to replace existing service providers with newer ones. The tendency to experiment will increase and service providers will respond with different incentives. Buyers will increase their focus on extracting more productivity in their application portfolios. This will not be limited to service providers but will also include their internal operations (e.g., global in-house centers). Next-generation technologies (cloud computing, mobility, and analytics) will witness further demand, but “bread and butter” capabilities will still comprise the core criteria for service provider evaluation.
“The transformation taking place in application outsourcing is a direct result of buyers pushing their incumbent providers to drive up productivity and deploy next-generation technologies,” said Jimit Arora, vice president at Everest Group who leads the report team. “A shift in buying centers is a part of this change, and we’re already seeing, service providers investing in targeting the “non-CIO” buying centers to offer next-generation services. Moreover, they will increase efforts to retain strategic clients by offering better commercial constructs.”
The research covers AO adoption trends, demand drivers, next-generation services such as mobility, analytics, and cloud. The research analyzes buyer challenges, trends shaping the market, and also provides an outlook for 2014 for the broader IT as well as AO market, including deal trends (new vs. renewals), deal size and duration, scope of services (e.g., application development, maintenance, and consulting), pricing trends, and delivery locations.