IT outsourcing revenue under pressure: Gartner

A ‘hypercompetitive market’ will keep revenue growth in New Zealand’s IT outsourcing sector flat for at least the next few years, according to market analysts Gartner.

Rolf Jester, vice president and distinguished analyst for Gartner, says that means service providers will be forced to innovate if they want to achieve growth.

Next year, the New Zealand market is only expected to grow by 1.2%, Jester says, followed by 1.5% in both of the following years.

In comparison, the worldwide ITO market grew by 7.8% in 2011, driven largely by expansion in countries like India.

"There is quite a severe price pressure on the providers in terms of demand for the market,” Jester says.

"Every year people are renewing their outsourcing deals, the providers are putting up new deals and people are negotiating quite hard.

"It’s a hypercompetitive market, with lots of people vying for business.”

Of particular note is the entry of telecommunications companies into the IT sector, Jester says.

"These companies are in the business of building big infrastructure, investing in capital and repeatedly delivering on that. That’s a model that works well at scale.”

Indeed, New Zealand’s leading IT outsourcing company is a telco spin-off: Telecom IT subsidiary, Gen-i.

Jester says Gen-i claimed 17.6% of the market in 2011, followed by IBM on 14.4%, HP on 10.5%, Datacom on 9.4% and Fujitsu on 4.3%.

Luckily, it’s not all doom and gloom, as decreases in spending also open up budgets for new opportunities.

"A lot of businesses will be able to do things they couldn’t afford before,” Jester says.

"It just means growth for the individual provider will have to come from doing something better or smarter. They’re not going to make more money just by doing business as usual.”