Record Growth set for UK Retail Outsourcing Market

It has been a depressing year for retailers in the UK, with a number of major high street names issuing quarterly profit warnings after a dramatic drop in consumer spending. However, the knock-on effect of this slump looks set to be a very positive one for the UK outsourcing market. This development along with other major trends is reported on in Pierre Audoin Consultantís recently published report on the UK Retail and Distribution Sector, based on analysis carried out in the UK between June and October, 2005.

The high street has been a tough place to do business over the last twelve months and the reverberations of the current downturn will affect the level of IT spend in the retail sector for the next year at least. Retailers are having to redress priorities as well as focus on cost cutting measures. As a result, IT spending on applications and tools will see market growth for 2005 and 2006 as retailers try to better understand their customers.

However, outsourcing will be the big winner as many retailers embark on an aggressive cost-cutting strategy and look for greater efficiency savings. According to PACís estimations, the market volume of outsourcing in retail will rise to attain a compound annual growth rate (CAGR) of 10.5% over the next five years, peaking between 2005 and 2007. In fact, outsourcing now looks set to be the fastest growing sector within the UK retail and distribution market, promising to grow at an average annual rate of approximately 11% until 2007. This will subsequently place a market value on the UK retail and distribution outsourcing business of 1.2 billion by 2009.

Figure: Products & Services Growth in the UK Retail & Distribution Sector, 2003-2009

Much of this anticipated growth will come from infrastructure-related outsourcing as retailers hand over control of their desktop support and services in order to focus more on their core business areas, i.e. serving the customer. However, this will not be the key growth driver behind the anticipated surge in outsourcing that PAC anticipates in two to three years time. Rather, this growth will come from applications-related outsourcing, albeit in a somewhat piecemeal approach, as retailers begin to establish more trusting relationships with their IT suppliers.

This will be quite a turnaround for retailers who have always been somewhat reluctant to embrace outsourcing due to their risk averse nature and fear of sharing information. Yet, the advantages of outsourcing are now undeniably attractive to retailers, not least because of the opportunities they offer to increase oneís own competitive edge in a market where competition is already fierce and pressure to cut costs intense.

In this context, outsourcing promises to not only enable the retailer to rely on more predictable cost models and off-balance sheet financing but also allow them to optimise the use of scarce internal resources, in turn enabling the retailer to re-focus on meeting the needs of its customers

According to PACís rankings, IBM, Accenture, Fujitsu and Xansa, are the current market leaders in the UK retail and distribution outsourcing market. Although some of the pure Indian offshore players are now formulating competitive bids for UK contracts, such as TCS who has steadily grown its capabilities in infrastructure-related outsourcing.

As a result, the degree of industry expertise and level of embedded consulting provided are likely to determine whether a UK company wins an outsourcing contract and therefore capitalise on this highly lucrative market.

Figure: PAC rankings of the leading suppliers in the UK retail and distribution outsourcing market, 2004

About Pierre Audoin Consultants (PAC): PAC is the leading European market research and strategic consulting firm for the Software and IT Services Industry (SITSI). We advise IT companies on developing successful end-to-end growth strategies in Europe and in the U.S through planning, development, implementation, and ongoing support. This is done through market analyses as well as consulting engagements.

Headquartered in Paris, we have been supporting over 300 clients worldwide for close to 30 years. We manage our clients through a specialised local network with subsidiaries in Munich, New York, London and Bucharest.

Author:
Henrietta Lacey, Tel: 44 (0)20 7397 8365
h.lacey@pac-online.com