IT services spending in Europe will shake off its early-decade blues to recover to €129 billion euros by 2008, according to a new report by Forrester Research B.V. (Nasdaq: FORR). But the research firm warns that a surge of outsourcing uptake will reshape the whole market, forcing vendors into wholesale reinvention.

“Early predictions of an IT services spending rebound during 2003 have bombed as Europe’s major economies remain stubbornly stuck in a low-growth rut,” said Forrester Senior Analyst Andrew Parker. “But successful IT services firms between now and 2008 will not rely on a market of booming demand. They will instead carefully match their service offerings to the cost-driven agendas and business-value expectations of clients. Through effective cherry picking among high-growth service categories, a minority of providers will beat the mainly single-digit annual spending growth.”

Forrester predicts that European enterprise spending on IT services will reach more than $euro;129 billion in 2008, up from €82 billion in 2002. Europe’s 8 percent compound annual growth rate (CAGR) between 2002 and 2008 is moderate by the standards of the 1990s and lower than American IT services spending, which will achieve 10 percent CAGR over the same period. However, it does show a 3 percent uplift on earlier predictions during the recession. The next two years will see the strongest resurgence of IT services spending — with growth reaching 10 percent for all services in 2004 and 11 percent in 2005. A wave of outsourcing spending spurred on by firms’ enthusiasm for reducing costs will be the key driver for this growth. Late 2004 and early 2005 will witness a surge of pent-up demand as firms relax the tight spending controls imposed during 2002 or early 2003.

During 2002 and 2003, Forrester found that agile firms sustained revenues by cashing in on an upturn in outsourcing deals. Forrester forecasts that this outsourcing shift will accelerate as European companies look for low-cost IT options, hand off capital IT assets, or seek new pay-as-you-go or value-based outsourcing models.

“With double-digit growth rates of up to 20 percent per year, infrastructure outsourcing will grow at a CAGR of 14 percent to rack up €34 billion of spending in 2008 — up from €18 billion in 2003,” Parker added. “By contrast, systems integration will achieve just 4 percent CAGR and fall from a 50 percent share of enterprise IT services spending to 43 percent by 2008. The total contract value of European outsourcing deals worth €50 million or more increased in 2003 by 87 percent compared with 2002. And with a CAGR of 18 percent, Forrester puts BPO at the top of the growth tree in Europe. Resulting strong growth across categories like human resources, finance and accounting, and call center services will drive Europe’s 2008 BPO spending to more than €22 billion.

“Finally, as large user firms turn to intermediaries for advice on outsourcing relationships or to negotiate contracts, consulting firms will see outsourcing strategy consulting accelerate. With a CAGR of 15 percent between 2002 and 2008 — outstripping growth in business process reengineering and IT strategy consulting by three to four times — this discipline will climb to a total of slightly less than €1.4 billion in 2008, more than double the figure in 2002.”

For the report “Forecasting Europe’s Outsourcing Stampede,” Forrester interviewed 20 senior IT decision-makers at large European firms.