Gartner: The big IT outsourcing contract returns

Two recent major contracts point to the return of big outsourcing deals.

Earlier in January, Canada Post announced it has entered into an agreement to transition Innovapost, its IT shared-service provider, to Deloitte Canada, in a bid to improve the delivery of digitally enabled products and services. Vodafone also announced a $1.5bn, 10-year deal with Microsoft to support digital platforms for more than 300 million businesses, public sector organisations and consumers across Europe and Africa.

According to John-David Lovelock, distinguished vice-president analyst at Gartner, these two contracts represent the tip of the iceberg in terms of major IT outsourcing. “CIOs [chief information officers] are having major difficulties hiring and retaining employees,” he said. “They suffered from the great resignation like everyone, but they haven’t been able to recover.” 

Lovelock pointed out that IT staff with the desired skill sets are moving towards technology providers as a preference for work. “This means that filling the tech skills gap is getting harder and harder,” he said.

Lovelock noted that organisations are continuing to find more uses for technology and IT has moved out of the back office, through the front office, and is now revenue producing. But finding the right skills to build the technology required by digitally enabled business initiatives is becoming increasingly difficult.

One way around the skills shortage is short-term, small outsourcing deals. However, he said that longer-term, organisations outsourcing everything makes more sense.

By 2027, Lovelock said that in most industries, 50% more will be spent on IT contractors compared with internal IT staff, driven by the CIO’s inability to retain higher-skilled staff. “There is a lot more technology coming up that needs higher skill sets,” he added.

The analyst’s latest forecast shows that IT services will continue to see an increase in growth in 2024, becoming the largest segment of IT spending for the first time. Spending on IT services is expected to grow 8.7% in 2024, reaching $1.5tn. According to Gartner, this is largely due to companies investing in organisational efficiency and optimisation projects, which are crucial during this period of economic uncertainty.

Some major brands, which have demonstrable tech innovation, may be able to retain and continue to attract a high calibre of tech talent, but in Lovelock’s experience, the companies with problems in hiring tech talent are the least likely to notice. “They’re seeing IT purely as an expense and they just need some warm bodies,” he said.

Such companies may regard the current skills crisis as a short-term issue that they need to work through by hiring IT contractors. “They hire some labour from an IT provider and sign a few short-term managed contracts for IT services like printer servers and networks,” said Lovelock.

He said smaller firms will likely be able to pick up such contracts relatively easily. Larger IT service providers are unlikely to look at these contracts as a source of revenue. Rather, Lovelock said they become an entry into larger discussions. For instance, he said an IT service provider could offer the CIO a staff augmentation contract for three months, and if that does not work out, the service provider may then convert this contract into a managed service deal for a year, which eventually is extended to five years or more.

Lovelock said the return of IT outsourcing contracts changes the role of the CIO. “Instead of being the individual who decides on the strategic direction and technology to implement, the value proposition of the role changes,” he said, adding that CIOs have to adapt to a role where they set the tone and direction for technology in the company, and manage the people that implement and run it on the company’s behalf.