Q&A: Wolfgang Benkel, Forrester Research
Wolfgang Benkel is Principal Analyst at Forrester Research, working out of Frankfurt, Germany. His latest report looks at the outsourcing of IT infrastructure within Europe; we spoke with Wolfgang about some of the differences between the European and US models, and about some ongoing trends impacting upon the marketplace.
Outsource: Wolfgang, in your report Market Overview: European IT Infrastructure Outsourcing you’ve found that growth of the European ITO market is higher than in the US. Why do you think this is – and do you think this trend will continue?
Wolfgang Benkel: Demand for outsourced infrastructure services in Europe in 2008 was down by 1.1% and then 8.5% in 2009, whereas during this time the US saw a growth of 3.8% and only a minor drop (0.2%) respectively. Recovery started in 2010, when ITO spend went up by nearly 3% (similar to the US), and Forrester believes that this year it will grow 8% to €55 billion. This growth is higher than in the US (6.8% to $101 billion). Our estimated numbers for 2012 show that this trend is set to continue.
There seems to be a “backlog” in the demand for IT infrastructure outsourcing among European firms – who reacted far more cautiously to the financial crisis than their US counterparts – that is now being caught up. Infrastructure service provisioning in the European market is also more complex, with different national interests and cultures, the support of many native languages, and client organisations’ responsibilities are distributed and country-specific — which increase the need for outsourcing.
O: How does the diversity of linguistic, economic and socio-political cultures within Europe – compared with the comparative homogeneity of the USA – impact upon the ITO space?
WB: The main impact of the diversity of the European market is on the pricing of ITO services, meaning that these services are more expensive in Europe. Different native languages in Europe mean a variety of language skills are required to provide infrastructure services, especially for end-user-dedicated services like on-site, IMAC support and service desk.
Most European service desks support more than one language, in contrast to US-based service desks which mostly support only one language. We also see support of different languages of the desktop operating systems installed, which is increasing the level of complexity (as well as the cost) of these services.
Many European companies are distributed organisations, which imply (more involved) business unit and geographical responsibilities. In most cases, this also applies to the IT organisations. Distributed IT, dispersed IT responsibilities, less centralised or shared service organisations result in non-transparent costs and service delivery, which in turn hinders the optimisation of the services. In some cases there are special legal considerations and tax policies that impact the IT service delivery as well.
O: One of your key findings is that, in Europe, “outsourcing the entire IT infrastructure is no longer in demand”. What are the reasons behind this and, in your opinion, is this likely to be a permanent state of affairs?
WB: Many companies (second-generation outsourcing and above) have gained negative experiences with outsourcing the entire IT infrastructure to one provider. Long-term, inflexible, contracts; poor quality of service; a lack of (noticeable) improvements; non-transparency; and pricing that is felt to be too high, are some of the reasons. The selective (best of breed) sourcing approach reduces the risk, increases the flexibility, reduces the dependency on one provider, and allows for a better comparison of services with the market. In some cases, this approach can decrease the cost as well.
But an important consideration is that clients should define the selective service scope carefully, because the bundle of service elements needs enough room for service improvement and must be attractive enough for providers. Also, the number of additional providers increases the effort of service and provider management and needs a standardised process and system management tool framework.
Forrester believes that the strategic right-sourcing approach – which means a smaller scope, and including the right bundles of service elements (including cloud based services) outsourced to a manageable number of providers – will be a trend in the coming years.
O: Do you feel that there is the potential for saturation in terms of the number of providers now operating in Europe – and if so what type of company is best placed to flourish going forwards?
WB: In the last years we saw many mergers and acquisitions in the external provider market. This year Forrester expects to see further market consolidation activities, and in our opinion this is only the beginning of a major acquisition spree.
Companies that have a broad portfolio and the required local presence will be the ones that are best placed to flourish going forward. In addition, those that are most flexible in terms of responding to their clients’ requirements stand a better chance in this type of (consolidating) market.
O: How has the ITO space in Europe been impacted by the financial crisis – and do you foresee a significant impact coming from the continent’s ongoing sovereign debt crisis?
WB: See figure one from the report… [see below – Ed]. Another result of the financial crisis is that clients are looking more closely at the financial stability of providers during the vendor selection phase, and include statements into the outsourcing contract to mitigate the risk of vendor bankruptcy and/or acquisition.
O: What do you see as being the main ramifications for European ITO of the development and proliferation of the cloud model?
WB: Cloud service models will support the trend to smaller contracts, faster replacement of existing infrastructure providers, and a price reduction of standard infrastructure services. Based on existing clients’ heterogeneity of service environments the main offering of external providers will be a mixture of managed and cloud-based services including consulting services for cloud readiness and cloud integration.