WhitePaper

2005 IT Vendor Roadmap to Buyer Dynamics

Lise Dellazizzo
Vice President, Ipsos-Reid

Includes key findings from the Ipsos-Reid information technology report

IT Outsourcing in Canada: The IT Vendors Guide to Customer Economics
 Ipsos in North America
Ipsos is the fastest growing market research company in the U.S., market leader in
Canada, and among the most trusted research brands in North America. With more than
1,300 professionals and support staff in the U.S. and Canada, Ipsos offers a suite of
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and methodologies – in advertising, customer loyalty, marketing, and public affairs
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largest news organization – Business Week, Newsweek.com, as well as Canada’s national
newspaper, The Globe and Mail, and the CTV network.
In 2004, Ipsos generated $752.8 million U.S. in total revenues, of which 38% came
from its North American operations. The Paris-based company was founded in 1975
and has been listed on the Paris Stock Exchange since 1999.
Visit www.ipsos-na.com to learn more about Ipsos’ offerings and capabilities.

–2– 2005 IT Vendor Roadmap to Buyer Dynamics • © 2005, Ipsos • March 20 05

Executive Summary
In 2004, Ipsos-Reid conducted a series of executive interviews with 305 senior IT
managers and 298 business executives from the Canadian headquarters of companies
across the country. Four major IT markets were selected as the focal points for this
research: applications, services, hardware and infrastructure and security.This study
resulted in a major report based on an unprecedented business sample of 603 individual
companies.

Top Line Findings

The shifting trend that is increasingly moving Canadian companies towards outsourcing
will have a significant impact on what strategies work best to maximize buyer
investments in IT over the next 12 months. Some of the key impact areas reviewed in
this white paper include:
• Canadian companies do not expect to spend more on IT this year; in fact,
they plan to spend 4.4% less
• Outsourcing spend will continue to increase through 2005
• BPO is one of the leading outsourcing areas for net new deals in the pipeline
• Three out of four companies invest in IT without having performed an ROI
or TCO analysis prior to investing
• On average one in four Canadian businesses faces a major technology
integration issue
This Ipsos-Reid white paper highlights some of the key findings from our exhaustive
study and provides a unique opportunity to obtain valuable insight from business and
IT leaders across the nation.

2005 IT Vendor Roadmap to Buyer Dynamics • © 2005, Ipsos • March 20 05 –3–

 Canadian Investment in IT
Canadian companies expect to spend less on IT this year. Based on aggregated data
from 603 surveys, businesses across Canada plan to spend $44.6 billion on applications,
hardware and infrastructure, services and security in 2005, down from $45.1 billion
in 2004 and $46.7 billion in 2003 (all amounts in Canadian dollars).This represents a
4.4% drop within a three-year period.The steepest decline is in the applications sector,
with a 13% decline by the end of 2005.
Despite this decline, dollars spent on outsourcing will actually increase by 5% overall,
from 44% in 2003 to 49% in 2005, and by 6% over the same period in the application
services sector.
These market dynamics indicate a shift in spending patterns.Vendors are looking at a
buyers’ market where total IT spend will decrease, but the percentage of spend allocated
to outsourcing will increase.Table 1 provides a detailed overview of IT spend by market
sector, company size and vertical group.
Table 1: Shift in Spending Patterns 2003 – 2005 ($CM)
Total and Major IT Sector

2003 2004 2005 % Change

in spend
$ % $ % $ % 2003–2005
Total Spend
46,717,275 45,120,404 44,632,548 –4.4%
all Sectors
Direct Spend 26,161,674 56% 23,011,406 51% 22,762,599 51%
Outsourced
Spend 20,555,601 44% 22,108,998 49% 21,869,949 49% +5%
Total Spend % % % % Change
each Sector $ Spent Outsourced $ Spent Outsourced $ Spent Outsourced in spend
2003–2005
Applications 16,351,046 43% 14,889,733 50% 14,282,416 49% –13%
Hardware &
Infrastructure 18,686,910 38% 18,048,162 43% 17,853,019 42% – 4.5%
Services 8,409,110 63% 8,572,877 64% 8,480,184 63% +1%
Security 3,270,209 40% 3,609,632 44% 4,016,929 45% +23%
Base: Revenue All Respondents (n=603) Percent of Revenue Outsourced (n=596)

Major Outsourcing Trends

The Canadian business community is poised to accelerate its adoption of business
process outsourcing (BPO) services. An 8% increase of net new BPO service contracts
over the next year to 18 months is expected based on the findings in our study, from
20% of companies that outsourced BPO in 2004 to 28% that plan to outsource by 2006.

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The most significant rate of deployment for BPO services over this period will be in
the large enterprise segment. Until now, the highest percentage of usage for BPO was
primarily in the small and mid size market, with 27% of small companies and 19% of
mid size companies indicating that they outsourced these services in 2004. We will see
significant change over 2005 and into 2006, primarily because of a shift in adoption
of BPO services in the large enterprise sector, where outsourcing will reportedly increase
from 13% in 2004 to 35% by 2006. Figure 1 provides an overview by company size.

Figure 1: Business Processes

Net New Outsourcing Activity Migration by Company Size

Small Medium Large Total

40%
35%
35%

30% 28%
27%
23%
25%

19%
20%

15% 13%
11% 12%
11%
10%

5%

0%
2004 12 Months 18 Months
Base: All respondents (n=603)
© Ipsos 2005

Many IT providers have already shifted their focus to include business process and
consulting services in their outsourcing portfolio, in response to increased customer
demand for more comprehensive services that include not only technology but also
strategic and business services.
Another important outsourcing trend that surfaced in our research was customer
behavior towards service providers, specifically with regards to existing outsourcing
contracts. Companies are likely to deepen their relationships with service providers
and expand existing contracts, rather than to deploy net new service contracts. In the
applications sector, for example, this is likely to occur either by broadening selective
application outsourcing agreements or by incorporating application related services into
larger IT outsourcing agreements. This trend will be more pronounced in the mid
and large enterprise segments, where application outsourcing is more mature, resulting
in fewer but possibly larger new outsourcing contracts coming into the market this
year and next.

2005 IT Vendor Roadmap to Buyer Dynamics • © 2005, Ipsos • March 20 05 –5–

 Cost Reduction and Cost Management
The pressure to reduce cost was revealed as the strongest motivator for companies to
outsource overall. Over half (54%) of companies indicated that this was their chief
reason to outsource. Given the scope of the study, we believe this finding reflects a
significantly uniform voice in the Canadian business community.
The pressure to increase speed and agility were also high up on the list of conditions
that would spur the decision to outsource, with 52% of companies indicating that this
factor was key in their decision to consider outsourcing. Close behind was the need
to reinvest in hardware and infrastructure, with 50% of companies indicating that this
was a key touch point when considering outsourcing. Figure 2 shows the top drivers
behind the decision to outsource for key decision makers across Canada.

Figure 2: Top Pressure Points to Consider Outsourcing

Pressure to reduce cost
54%
Need to reinvest in upgrades and infrastructure
50%
Loss of customers
20%
Pressure to increase speed and agility
52%
Unable to integrate applications to existing legacy
46%
Other
10% Cost and
bottom line
(DK / NS) motivated
4%

0% 10% 20% 30% 40% 50% 60%

Percent
Base: All respondents (n=603)
© Ipsos 2005

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Financial Assessments and ROI
While the top driver of outsourcing is pressure to reduce costs, 37% of companies in this
study perceived cost of outsourcing as a major challenge. Although this appears to
contradict the value proposition on which outsourcing is based, the study also yielded an
important finding that might shed light on why buyers fail to see a return on investment
(ROI) with outsourcing.
When asked if they had done an ROI or total cost of ownership (TCO) evaluation to
determine their IT costs and obtain visibility into whether they were getting a return on
their investment, an alarming 77% of companies indicated that they had not undertaken
any such assessment. Of the 603 companies surveyed, 136 reported that they had done
a financial evaluation of their IT, and in 73% of these cases, changes were implemented
as a result.
We believe these findings indicate that a financial analysis can have a quantifiable impact
on assessing ROI, TCO and other key metrics associated to IT. Assessments are a
valuable tool that provide clarity into what a company is spending and where dollars
are being spent, thus helping decision leaders formulate sound technology investment
strategies based on firm analysis. Figure 3 provides an overview.

Figure 3: ROI or TCO Evaluation Done to Determine IT Costs

77% of total companies do not 73% of the 136 companies that
perform an ROI or TCO evaluation did (or 23% of total sample)
to determine IT costs implemented changes as a result

Yes
23% No
27%

Yes
73%
No
77%

Base: All respondents (n=603) Base: (n=136)

© Ipsos 2005

2005 IT Vendor Roadmap to Buyer Dynamics • © 2005, Ipsos • March 20 05 –7–

 Key Integration Challenges
The findings in this study provided insight into a range of integration issues plaguing
many businesses today. A high percentage of companies revealed that they were
experiencing significant technology challenges. This could be an important indicator
that companies across Canada are struggling with integration. Some sobering
findings include:
• A total of 31% of companies revealed that they were unable to integrate new applica-
tions with existing technology. This could be due to a lack of skilled expertise and
increasingly complex integration requirements with regards to new applications and
legacy systems. Not surprisingly, this problem was more acute for 43% of small
businesses, where internal resources tend to be limited.
• The cost of integrating technology with systems and networks was a chief challenge
for 35% of companies. Cost was a more important issue for 41% of companies in the
mid market. The lack of forward planning and scalability was also a leading challenge
for 25% of companies when it comes to integrating technology with systems and
networks. This was considerably more pronounced for 32% of companies in the large
enterprise segment.
• The inability to integrate existing technology with business processes was a significant
challenge for 27% of companies. Small companies felt this pain more acutely, with
37% of businesses from this segment reporting that the lack of process and work flow
expertise was a leading integration problem.
• The most prominent challenge overall when integrating new and existing technology
was the lack of process and systems integration expertise for 43% of companies.
This was slightly more pronounced in the large enterprise segment (45%). The cost
of integrating new with existing technology was the next leading concern for 40%
of companies.
As companies increasingly embrace outsourcing as an immediate and long term solution
to counteract competitive and efficiency pressures, one of the outcomes of this trend
may be a reduction of their internal resources. It is important for providers to remember
that outsourcing does not lessen the need for skilled and specialized resources, it merely
transfers that responsibility from the customer to the provider.These findings clearly
indicate that companies continue to be faced with integration challenges and the onus
is on providers to lessen their pain.

Conclusion
The coming year appears to be crucial for providers to solidify existing customer
relationships and address any potential weaknesses that may expose competitive vulner-
abilities.Vendors may need aggressive strategies to capitalize on a buyer environment
that is shifting towards outsourcing.
This is especially significant for providers in the software industry. An anticipated
decline of 13% over three years in net new spending by the end of 2005, combined with
an increase of 6% in spend earmarked for outsourcing in the applications sector is a
strong indication that software vendors need to make inroads in the application services
market. This move will ensure that software providers possess the versatility required
to weather this transition and develop an ancillary, services based revenue stream.
Managing existing customer relationships as a pre-emptive competitive measure in what
might be an increasingly competitive environment in the IT services space is pivotal to
ensuring sustained growth. In the end, only a handful of providers will come out ahead
of the others with it comes to market and wallet share. Success ultimately depends on
the ability to differentiate oneself and deliver an uncompromising agility and adaptive
commitment to progressively changing buyer needs.

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Methodology
This research for this study is based on primary data collection. A total of 603 companies
were selected to participate in this study. The number of companies selected to represent
each cell or segment in the study based on company size and vertical group represent an
accurate reflection of Canadian IT buyers across Canada.
The standard error for 603 surveys at a 95% level of confidence is a 3.99% margin of
error. A rigorous and unbiased methodology was applied to aggregated survey data to
project spend data based on existing Canadian business counts.
The prerequisite qualification for each respondent was that they be senior decision
makers within their company in either an IT or business executive capacity. This
included CIOs, CTOs, directors, and managers. A total of 305 interviews were completed
with senior IT managers. Business executives included CEOs, presidents, CFOs,
VPs, LOBs, directors, and senior managers. A total of 298 interviews were completed
with business executives.
The research was conducted using two parallel approaches with each company:
a survey and an interview. Following selection, each respondent was sent the financial
expenditures section of the survey and requested to gather the appropriate information
before the interview. A telephone interview was set up within one to five business
days following receipt of the survey.The financial expenditure information was reviewed
and collected during the interview. No other aspect of the survey was revealed to
the respondent before the interview to ensure the validity and spontaneity of responses.
An executive team of Ipsos interviewers conducted all interviews. These professional
interviewers are trained to execute senior level interviews for Ipsos across North
America and globally. In Canada, interviews were conducted in English and in French.
Our study examined four major IT markets: applications, hardware and infrastructure,
services and security. The parameters for the major IT markets included in this
study included:
• Applications sector: Software licenses and maintenance, development and
customization, management and maintenance
• Hardware and infrastructure sector: Servers, desktops, notebook PCs, hardware
maintenance, network systems, system management, monitoring, backup,
and connectivity
• Services sector: Systems integration, business consulting, business processes, business
process outsourcing, and IT resources
• Security sector: Facility (data centre), maintenance and support and human resources
Respondents were provided with descriptions of the market parameters where appropriate
(for example, in the financial expenditures section of the survey) in order to accurately
respond to questions.

2005 IT Vendor Roadmap to Buyer Dynamics • © 2005, Ipsos • March 20 05 –9–

 Companies were segmented by employee size into small, mid and large size companies,
as follows:
• Small companies: These are companies with 1 to 99 employees. For the purposes
of this report, however, we included companies with 30 to 99 employees only.
• Mid-size companies: These are companies with 100 to 499 employees. During
the data collection and analysis phases of this study, the mid size segment was further
segmented into 100 – 249 and 250 – 499 employees in order to ensure an adequate
representation in the upper tier of this segment.
• Large enterprises: These are companies with 500+ employees. When collecting
data for this study and selecting respondents by company size, we included very
large enterprises in this segment (companies with 1000+ employees).
The four vertical groups used to segment data by industries in this study were: financial
and insurance services, communications and services, government, and manufacturing.
Each group includes the following industries:
• Financial and insurance services group: Banks and financial services companies,
insurance services and carriers
• Communications and services group: Broadcasting, media, telecommunications;
information services and data processing professional and technical services
• Government group: Federal, provincial, and municipal government sectors,
education, and health
• Manufacturing group: Industrial, distribution, wholesale and retail
For more information on the IT Outsourcing in Canada: The IT Vendors Guide to
Customer Economics study, please contact Ipsos at 1.888.210.7425.

– 10 – 2005 IT Vendor Roadmap to Buyer Dynamics • © 2005, Ipsos • March 20 05

About the Author
Lise Dellazizzo is a Vice President at Ipsos-Reid, specializing in information technology.
Lise has held a number of senior research positions over the past fifteen years, and
has focused in the high tech industry for the last eight years. She’s a specialist in market
research, competitive intelligence, and new venture risk analysis in a number of sectors,
including information technology, telecommunications, and biotechnology. Before
joining Ipsos, Lise worked as Director of Research for IDC, a global IT market research
company, where she managed the IT outsourcing technology solution area. She also
developed a global market intelligence practice for Marcus Evans, an international
publisher and conference corporation, where she managed a team of global analysts and
produced worldwide research studies focused in emerging and high risk technologies.
Lise can be reached at 1.416.324.2283 or by email at lise.dellazizzo@ipsos-na.com.

2005 IT Vendor Roadmap to Buyer Dynamics • © 2005, Ipsos • March 20 05 – 11 –

North America

Europe

Latin America

Asia-Pacific

Middle East

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