The Global Trend towards IT Outsourcing – Opportunities for Taiwanese IT Service Providers

By Weng, Wei-Hsiu, Wang, Yi-Chi, Liu, Chu-Hui, Hung, Sheng-Min and Lin, Hsin-Heng

The last few years have seen the emergence of IT outsourcing as a major driver of growth for the global IT services market. IT outsourcing is an area that offers significant opportunities for Taiwan’s IT service providers as they seek to expand into international markets.

The Steady Growth of the Global Outsourcing Market Offers Substantial Growth Potential in the Areas of Network Systems, Human Resources and Procurement Outsourcing

The term “IT outsourcing” refers to the outsourcing of traditional IT management operations to external service providers. Normally, the main motivation for adopting IT outsourcing is the opportunity to reduce operating and system maintenance costs. Enterprises may choose to divest themselves of non-core businesses, and they may obtain technical support from specialist firms. IT outsourcing can be divided into two broad categories: ITO (Information Technology Outsourcing), and BPO(Business Process Outsourcing).

With the intensification of globalized competition, business enterprises are working actively to enhance their business development capabilities, and seeking to leverage new IT technologies to support the rapid introduction of new businesses. As a result, demand for IT outsourcing has grown dramatically. From the point of view of business operations, there are limits as to how far an enterprise can expand its headcount; until such time as economies of scale have been achieved in a new business, it may make more sense to outsource the activities in question, thereby gaining maximum flexibility in manpower allocation and manage with a wide range of front-end technologies and applications.

Statistics compiled by the Institute for Information Industry’s MIC (Market Intelligence Center) as part of the ITIS project that MIC was commissioned to carry out on behalf of the Ministry of Economic Affairs indicate that, in 2008, the global IT outsourcing market is expected to reach a scale of US$322.8 billion, representing a CAGR(Compound Annual Growth Rate) of 8.2% over the period 2005 – 2008. The global IT outsourcing market thus continues to grow steadily. ITO is the largest segment and is expected to account for 60.8% of the global IT outsourcing market in 2008. The ITO segment has already reached a high level of maturity, with a wide range of different products and services available.ITO generally does not impact on an enterprise’s core business areas; given the cost savings that it can provide, ITO can be expected to maintain its status as the main focus of IT outsourcing in the future. By 2010, data center outsourcing is expected to be the largest single sub-segment within ITO. Data center outsourcing reduces the administrative load that business enterprises need to bear, and permits savings in IT expenditure. This area of IT outsourcing has already reached a high level of development.

Steady Growth in ITO in the Asia Pacific Region, Particularly in China and India

Within the Asia Pacific region, the fastest growth in IT outsourcing is in China and India, both of which are expected to post a CAGR of over 30% during the period 2006 – 2011. This strong growth is related to the double-digit GDP growth that these two countries have maintained in recent years, which has boosted domestic demand and attracted foreign investment, thereby leading to a substantial increase in IT spending and outsourcing demand. The CAGR for the BPO segment of the IT outsourcing market in the Asia Pacific region is also very high, at 18.4%, reflecting the intensification of competition that has accompanied the region’s rapid economic development. More and more enterprises are choosing to outsource business processes in order to strengthen their new business development capabilities and reduce human resources and system maintanence costs.

Opportunities for Taiwan’s IT Service Providers

It can be anticipated that the global IT outsourcing market will continue to grow steadily in the future, with the Asia Pacific region offering particularly strong growth potential. Currently, the the global IT outsourcing industry is not concentrated in any particular area. Taiwan’s IT outsourcing providers are mainly concentrated in the ITO segment. Their major customers are mainly in East and Southeast Asia; in the Greater China region the possession of Chinese language capabilities is an important source of competitive advantage for them. ITO thus has the potential to become an important industry for Taiwan in the longtermfuture.

 

(Weng, Wei-Hsiu, Wang, Yi-Chi, Liu, Chu-Hui, Hung, Sheng-Min and Lin, Hsin-Heng are Researchers with the Software and Applications Section, Institute for Information Industry MIC; e-mail: weng@iii.org.tw)

Source: Intelligent Times
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