The year 2009 pushed the vendors to a variety of limits. Apart from reducing cost, they were compelled to offer more for less, be innovative (whether the client collaborated for the innovation or not), and focus on enhanced governance and risk management. While pricing continued to play a significant role in the recessionary environment, service providers with greater stability, strong existing relationships, improved technology and multi-shore operations (to decrease risk) saw a reasonable increase in their revenue.

Last year truly set new rules for the game; larger long term deals should be broken and awarded in smaller parts. This undoubtedly, will enormously add to the volume of contracts signed annually but will also give smaller vendors a chance to compete on level-playing field with the larger labor-intensive companies. A leading trend in the ADM industry is the rise of specialized vendors. A number of service providers in Eastern Europe and Russia continue to specialize in selected areas of ADM and are giving the bigger Asian players a run for their money.

Offshoring is not the only option the buyers have anymore. The application development industry is getting more dynamic and agile in nature. This is making room for flexible, less 'rigid' process oriented vendors. This includes onshoring, using the potential of the crowd (global crowdsourcing) and rural-shoring. With greater investment by the government of the United States on spreading broadband to rural areas and the culture of home-based jobs is making rural-shoring possible and helping young Americans win back jobs. Great effort is being put in by companies such as Rural America Onshore Sourcing Inc., Systems In Motion and a few others, in this area. Christopher Hytry Derrington, CEO, Rural America Onshore Sourcing Inc., says, "The availability of rural American talent which can be acquired at a cost 40% lesser than in the urban areas, now makes rural America an excellent outsourcing venue. This has been made possible by the spread of broadband Internet services. To further encourage the growing trend, the government has allocated $7 Billion to implement broadband in rural areas. Over the next few years, you will see millions of rural-based low-cost Americans entering the virtual workforce."

These new strategic low-cost outsourcing models (along with decline in the global development of applications) are slowly eating into the market share of the traditional service providers. For instance; Band 4 (companies with 1B+ turnover) respondents to the GS100 suvery experienced an aggregated decline of 12% in revenue generated from application development and maintenance. A similar negative growth was observed in Band 3 (companies with 100M-1B turnover); inspite of a marginal growth of 0.4% in the revenue for IT services.

A TPI report indicated service providers will continue to need different go-to-market strategies for each geographic region. While the ITO market in the Americas has been fairly consistent for the last three years, Europe has now surpassed it, setting a record for the highest spending in one year, and Asia Pacific had its fifth consecutive year of growth.

Another recent research by Valueshore Spain, the Spanish Government-backed group of IT consultancies, has found that custom application development and maintenance is set to be the biggest outsourcing focus for UK businesses over the next 12-18 months. 62% of IT directors questioned said that they already were, or planning to, outsource custom applications as businesses look to reinvest in IT following the recession. A report by IDC also indicated that the European IT services market is due to grow by 2.2% in 2011, with outsourcing set to be a major contributor.

Deals

While 2009 remained relatively dry; the 2010 brought with it recovery and many reasons to smile. The year so far has witnessed a number of significant deals in application development and maintenance.

Some of the significant deals are as follows;

One of the biggest deal this year was awarded to Avineon, a relatively little-known supplier of IT services to US federal government agencies. It secured a seven-year agreement with a ceiling value of $2 billion from the Federal Aviation Administration (FAA). The deal is part of the FAA’s eFAST contract vehicle, which is the agency’s preferred method of partnering with smaller vendors. In January, the FAA awarded a similar deal to Ian, Evan and Alexander, a service-disabled, veteran-owned business.

Other significant US public sector contract wins include those for defense specialists SAIC and CACI International, both with divisions of the US Navy, and SRA International, with the Department of Agriculture. SRA’s team of subcontractors on its $500m project includes CSC, IBM and SAP Consulting. Also, a US public sector contract awards went to: Northrop Grumman, which picked up a deal with the National Geospatial-Intelligence Agency to work on its Total Application Services for Enterprise Requirements (TASER) program.

Outside of the US public sector, this year also saw a number of large IT services deals announced in Europe. Much of the activity was centered on the Nordic region, with major wins for local vendors EDB Business Partner, ErgoGroup and Tieto. EDB’s deal, valued at over $300m, was awarded by telecommunications provider Telenor, and will see the companies work together to consolidate and virtualize a new technology platform that will deliver a more flexible cost structure, as well as more efficient systems for users. ErgoGroup, meanwhile, secured a four-year contract extension from its parent company, Posten Norge (the Norwegian Postal Service), to provide application management services. Coincidentally, EDB and ErgoGroup also announced plans to merge, creating a combined company with annual sales of close to $2 billion.

The ADM industry will continue to induce fresh skills and evolve over time to transform from strictly offering a 'solution-to-the-problem' to a more thought-oriented strategic solution. Only then will service providers be able to add value to their current offerings and help their customers gain a competitive advantage. This may not be an easy step to accomplish; and many buyers are awakening to realize the potential of collaborative re-engineering for the mutual benefit of both.

Growth Drivers

Some of the key factor that led to the growth of the ADM industry are;

Multi-shore delivery presence: Greater number of service providers are now willing to offer a global delivery model to encash on the global expertise and talent to achieve the cost benefits their customers want.

Cloud computing: It is undoubtedly the next step to make application development and usage most cost effective. Increasingly, vendors are tieing up with cloud-service providers such as Amazon, Google, Microsoft, etc. to offer custom-built application on a virtual server.

Lean processes: The processes continue to evolve and will never get out of fashion. The leaner, the better is the new mantra.

Agility and flexibility: The deal sizes are beginning to shrink. Larger projects will be divided into a number of parts. The requirements will constantly change. The need for agility and flexibility has never been greater. Service providers continue to adopt and emphasize on agile methodology and technology.

Challenges & Risks

Buyer expects the Vendors to share the risk
In the current scenario (of economic recovery) clients are being over cautious. In addition to low cost, the buyers are evaluating the vendors capability to innovate and absorb risk. That is, vendors not only will have to portray expertise, but stability and the willingness to share the risk during the development phase. Increasingly, customer-vendor relationship is transforming into one of partnership that focusses on usage of smart technologies like cloud computing, improvization to meet changing trends and sharing profits.

Market Risk
As compared to 2008, IT stocks are nearly 300 percent higher this year. Outsourcing giants like Infosys and Wipro have market values of $33 billion each. However, analysts warn that IT stocks may be ready for a break. Stock valuations until now have surpassed company growth rates, say reports. Though India is expected to restrict credit in the near future, it has a hgh price/earnings ratio of 25. Wipro, for instance, trades 34 times its earnings and has a projected long-term growth of 16%. Similarly, TCS trades 22 times its earnings, while Infosys trades 26 times- its earnings – this is almost twice Infosys’ long-term growth of 14.

Other risks
Some of the other risks that continue to disturb the stability of the offshore ADM industry includes protectionism in the United States, order delays, economic uncertainty, and a probable decline in the dollar. Further, governance of processes and talent, across different location with a variety of cultures, languages and time zone is proving critical for smooth operations. An inefficient strategy and lack of adequate rules for governance may disintegrate the global delivery model.

In spite of a number of factors and uncertainty, the demand still exists, and the ADM market is robust enough to post a healthy recovery in 2010. However, the larger portion of this recovery will be contributed by the application management and maintenance contracts scheduled to renew this year. While buyer continue to take genuine cost cutting  measures application development is expected to fall (as compared to most years in the last decade). The year 2010 seems to be that of higher maintenance contracts (of coarse, negotiated), reduced pricing, partnership-based relationships, increased use innovation for delivery, relaxation in volume commitments and the maturity of a global delivery mechanism.