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Steady growth for outsourcing

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The global outsourcing market continues to grow at a steady pace, with a forecast growth rate of 8,1% in 2008. But healthy growth rates for outsourcing do not necessarily mean that user organisations are without challenges. 

“Although user organisations often have fundamentally sound procurement organisations to initiate outsourcing contracts, for many, their IT sourcing strategies and governance structures are still immature, lacking altogether, or misaligned with enterprise objectives,” says Kurt Potter, research director at Gartner.
“Because these organisations lack the basic building blocks for successful vendor management and outsourcing success, expected cost savings and other benefits are difficult to obtain. In extreme cases, the lack of needed trust and control to optimize the outsourcing relationship results in deal failure. Also, more organisations focused less on outsourcing for cost savings than in previous years and more on using providers' global delivery models to access the right skills at a reasonable price, wherever they are.”
Although outsourcing continues to grow, publicly reported IT outsourcing (ITO) and business process outsourcing (BPO) contract values decreased overall by 50% in 2007. Part of the explanation for this apparent discontinuity is that as the outsourcing market matures and becomes more commonplace, there is less publicity of deals. Companies are simply outsourcing more, but electing to use a multiprovider strategy and more deals are simply smaller in size, with many of these deals not large or ground shaking enough to report.
“In 2008, we expect to see some early adopters of multisourcing to consolidate around fewer providers to reduce their service integration costs and harvest the benefits of better relationship management with fewer strategic suppliers,” says Potter.
“Because of multisourcing complexities often associated with handoff points between competing providers and unclarified vendor management processes, some organisations will consider prime-contractor outsourcing models or the appointment of new vendor management roles in their retained organisations.”
Buyers increasingly are moving work to lower-cost, offshore delivery centers. Although cost remains a major driver for global delivery models (GDMs), more-mature users are seeking ways to better support their business needs. Indian providers gained traction in Europe in 2007, but faced strong competition from more-established vendors with GDMs. Indian providers are growing approximately 40% annually in the US and 60% annually in Europe. Although spending on offshore services is three times higher in North America than in Western Europe, the gap is closing.
“Other countries will continue to emerge as challenges to India for a number of reasons,” says Ian Marriott, research vice president at Gartner. “Strong demand is putting a strain on the available Indian labor force, while staff attrition and cost increases remain high.
"Global companies continue to accelerate their demands for a presence in countries other than India, and providers are seeking to expand their geographic footprint of delivery centers accordingly.
"More-sophisticated buyers are seeking a multicountry strategy to minimize risk and align nearshore and offshore delivery centers with their primary time zones. Although India's offshore revenue will continue to grow, the country's share of total offshore spending will decline slightly in 2008.”
Gartner believes that the outsourcing market has reached a tipping point with regard to utility delivery models, and that change and innovation will take hold and accelerate in this area through 2008 and beyond. More providers are developing utility-based offerings across infrastructure, application and business process domains.
The trend toward software-as-a-service (SaaS) is gaining the most traction, with major software vendors, such as Microsoft and SAP, and large Internet players, such as Google and Amazon, making announcements about new SaaS offerings and mass-customized software platforms. User organisations need to realise that the utility delivery model is a viable alternative to traditional outsourcing, and they should seriously consider utilities in their sourcing strategies.