As IT outsourcing becomes a priority for many cash-strapped organisations, giant suppliers are reaping the benefits, potentially forcing smaller providers to offer technologies such as the cloud and virtualisation to survive, according to research by analyst firm Ovum.
According to Ovum, with many firms under pressure to cut IT costs in the downturn, a number are turning to outsourcing. As the recession continues to drive down prices and encourages suppliers to offer more flexible terms, outsourcing is becoming more attractive to customers who had previously shunned it.
Ovum said sectors including financial services, pharmaceuticals and life sciences, retail and travel are showing active interest in IT outsourcing. It highlighted recent £20m-plus deals between IBM and the Carphone Warehouse, CSC and Virgin Atlantic, and Xerox with nationalised bank Northern Rock, as "encouraging signs of such activity coming to market".
Deals are also becoming bigger for the largest outsourcing suppliers, according to the analyst firm. The 10 biggest UK IT outsourcing suppliers have boosted the total contract value of their deals signed in the first six months of 2009 by 31 percent, Ovum's research found.
Recent megadeals have included BT's £500m contract with the NHS, IBM and CSC's £300m deals with the government's Identity and Passport Service, and a £685m deal for HP-EDS at insurance giant Aviva.
The analyst warned that while such deals are good news for outsourcing's top tier, the second- and third-tier players are struggling, with deals falling into the hands of increasingly few companies.
"Without a clear understanding of, and a strategic response to the challenges faced, this has the potential to spell the end for the second- and third-tier UK IT outsourcing market," Ovum said.
However, pressure on smaller outsourcers could be a boon to customers, according to Ovum. It suggests suppliers should offer more for less by restructuring contracts, and use new technologies such as virtualisation and cloud computing to win and retain business.
Such a shift will require significant time and financial investment on the part of suppliers, Ovum said, and "will be a challenge to even the most financially stable vendors".