Western European organisations will spend 1.9% less on IT outsourcing in 2012 as they did last year, according to the latest estimates from Gartner.

"A challenging economic scenario that worsened in late 2011 continues to affect the government policies and end-user sentiment in many key European countries," the analyst company said. "Reinvigorated economic pressure is delaying the willingness of many commercial organizations to focus on enhancing competitiveness rather than cost reduction.

"In addition, the European public sector will continue to see a cautious budget environment throughout 2012," it added. "This will force many central and local government entities to concentrate on outsourcing initiatives aimed at reducing IT cost through IT efficiencies and rationalisation.

The finding echoes the latest TPI Index, from outsourcing advisory ISG, which found that outsourcing activity in Europe fell by 29% in the second quarter of 2012 year due to uncertainly about the Euro. Total contract value of outsourcing markets in the UK fell 12% to €5.7 billion, ISG found.

Global IT outsourcing spending will grow by just 2.1% this year to $251.7 billion, Gartner predicted. The North American and Asia / Pacific markets are still growing, at 6% and 1% respectively, with the fastest growth seen among emerging Asia / Pacific countries.

Data centre outsourcing (DCO), which represented a 34.5% share of the market in 2011, will decline 1% in 2012 to $33.5 billion. Gartner said that the market segment is currently undergoing changes that may allow suppliers to reach more, smaller customers in future.

"The data center outsourcing market is at a major tipping point, where various data centre processing systems will gradually be replaced by new delivery models through 2016," said Bryan Britz, research director at Gartner. "These new services enable providers to address new categories of clients, extending DCO from traditional large organisations into small or midsize businesses."

Cloud computing is the fastest-growing segment within the IT outsourcing market and is expected to grow 48.7% in 2012 to $5.0 billion, up from $3.4 billion in 2011. Cloud spending will increase as new applications built for deployment in cloud enviroments reach the market.

"Today, cloud compute services primarily provide automation of basic functions", said Gregor Petri, research director at Gartner. "As next-generation business applications come to market and existing applications are migrated to use automated operations and monitoring, increased value in terms of service consistency, agility and personnel reduction will be delivered."

Still, concerns about information governance continue to curtail growth. "Continued privacy and compliance concerns may however negatively impact growth in some regions, especially if providers are slow in bringing localised solutions to market."

Application outsourcing, meanwhile, is expected to reach $40.7 billion, a 2% increase from 2011 spending of $39.9 billion. "Change is afoot in the AO market," said Britz. "The burdens of managing the legacy portfolio, along with the limitations of IT budgets, have shifted the enterprise buyers to be cautious and favor a more evolutionary approach to other application services, such as software as a service (SaaS).”