IT Sourcing Europe presents its forecasts on the 2011 state of affairs in the European IT outsourcing market.

Judging from the perspective of IT outsourcing (ITO) services buyers, the following trends and changes are anticipated in 2011:

1. An increased demand for outsourced IT services from the public sector.

In 1Q 2010, public sector contracts awarded across EMEA stood at over Ђ9 billion and are expected to increase in 2011. In the UK alone, public sector gained a 75% share in the nation’s outsourcing spending, which accounted for 86% of EMEA public sector expenditure in 2010. It is expected that the demand to explore and utilize outsourcing opportunities in Europe will increase due to recent turmoil in such countries as Ireland and Greece as well as economic uncertainties in other EU member states. Governments of economically slow achieving countries will most likely help promote outsourcing as an effective cost arbitrage and quality maintenance tool and will definitely adopt outsourcing on different IT and non-IT related projects.

2. A shift from mere cost saving to access to qualified and lower-cost IT resources.

In 2010, Western Europe faced a significant shortage in IT skills and resources. In the UK, only half as many high school students went on to university to study IT/software development as did five years ago. In 2Q 2010, staff skills in C#, SQL, .Net and Java were in short supply, with the number of related jobseekers in decline. On the other hand, 2010 showed a significant increase in IT workforce and skills in Eastern Europe: Romania led in growth in the number of IT specialists with 12.33% followed by Ukraine with 9.51% growth. As per our Western European ITO study 2010, more than 20% of outsourcing companies admitted their plans to continue outsourcing their IT function in 2011 to get access to better qualified IT resources outside their home countries.

3. Nearshoring will hit the mainstream.

In 2011, more Western European clients will be outsourcing their IT nearshore (to Central and Eastern Europe) or nearshore and within own country. Of almost 2,000 non-outsourcing companies polled in the frames of our Software Development Best Practices Survey 2010, more than 22% plan to transfer their IT / software development nearshore versus only 11% of those who plan to outsource offshore. Factors that will be driving companies’ choice of nearshore outsourcing in 2011 are: geographical proximity (short travel time and, thus, increased communication with vendors), strong R&D potential of former USSR nations and strong language skills (Central and Eastern Europe offers not only good English language, but also German, French, Spanish, Italian language skills).

4. Service integration will help achieve innovation

In 2010 and previous years, many companies failed to achieve innovation in their outsourced operations, because they typically thought that transferring an IT project to be completed by the 3d party should enable them to focus on their core competencies. In 2011, more Western European IT leaders are expected to realize the importance of integrating the outsourced project management, orchestration and delivery, thus gaining full control of their sourced projects.

Judging from the perspective of ITO services providers, the following trends and changes are anticipated in 2011:

1. An increased focus on SMEs

In 2010, small and mid-sized enterprises accounted for 59% of the total EU economy, generated 67% of employment and contributed around two thirds of the EU GDP. In 2011, an increased demand to adopt outsourced IT services will come from the SME segment and providers should be ready to anticipate smaller and, thus, less profitable deals. To ensure more significant profits in the long term, IT providers will have to improve their adding-value service offering, cloud capabilities and modify current engagement models to help SMEs grow their business and, as a result, to benefit from their clients’ growth.

2. Innovative outsourcing engagement models will hit the mainstream

In 2011, Western European companies will be looking for a provider with the capacity to take over the entire product or application development process, and in some cases, help manage the entire business function. Therefore, companies will require from their potential partners to provide transparent cost structures, no hidden agenda, options to easily scale up or down in compliance with the current business situation and realistic HR growth capabilities for a preset period of time. ITO providers will have to adjust to such requirements and diversify/innovate their engagement offering. One of the innovative models that is likely to hit the mainstream in Europe in 2011 is the one in which IT vendor acts as a resource, office space and project mentorship provider, while the client retains 100% control of the outsourced project management and owns his own project teams set up nearshore for cost saving purposes.

3. No more client-silo approach

As businesses aim to learn more best practices by sharing knowledge with their peers across different industries, IT providers will be challenged to transform their client-silo mindsets and encourage collaboration between clients from various industry domains.

To conclude with, in 2011 European ITO will remain a highly demanded practice with some significant focus shifts towards agility, processes optimization, transparency of transactions and payments, innovation and cloud.