The U.S. market for IS outsourcing services will grow at a tepid compound annual growth rate (CAGR) of 3.0% for the five-year period between 2007-2011, according to a new report published by IDC. In 2007 alone, the market for IS outsourcing services will grow just 3.5% to $37.8 billion from $36 billion in 2006.

IDC attributes this moderate growth rate throughout the forecast to the maturity of the market. IDC's research shows that the applications outsourcing market is relatively smaller than the IS outsourcing market, with only $10 billion spending in 2006. Growth in this market, however, is expected to be more robust, with a 7.9% CAGR for 2007-2011.

"From a vertical perspective, government has the highest spending, with 25% of total U.S. IS outsourcing revenue coming from this sector," said Jony Moe, senior research analyst, Services Vertical Views at IDC. "Similarly, our research shows that the government is also the biggest spender in the applications outsourcing market, with 17.9% of the total U.S. spending." Other sizeable industries for outsourcing include discrete manufacturing, banking, and communications and media.

The government sector will move away from owning physical assets (hardware and software licenses) and move toward the services outsourcing model. IDC predicts future hardware and software sales in this industry to decline and services sales to grow.

Smaller vendors with the desire to crack the government sector should partner with vendors that have experience in that vertical. This will significantly increase their chance of winning contracts that could be out of reach otherwise.
Discrete manufacturing companies will continue their cost-cutting initiatives. Opportunities exist in streamlining their supply chain as well as back-office operations. Vendors well versed in IS and application outsourcing could help these companies achieve their objectives.

Application management spending in the banking industry is expected to be high as companies reinvest to modernize their legacy applications as well as build more robust online applications.