New age of outsourcing

Gartner's latest outsourcing report states that while the market is set for healthy growth in 2008, end-users need to realise that the utility delivery model is a viable alternative to traditional outsourcing.

Setting the tone for its May 2008 conference on global outsourcing trends, Gartner recently released a report on outsourcing in 2007, titled 'Gartner on outsourcing 2007-2008'.

 

The report states that the global outsourcing market continues to grow at a steady pace and forecasts a healthy growth rate of 8.1% in 2008. However, organisations continue to struggle with multiple 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," said Kurt Potter, research director at Gartner.

Because these organisations lack the building blocks for 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 optimise the outsourcing relationship results in deal failure. But, more organisations are focused less on outsourcing for cost savings than previously and more on using providers' global delivery models to access the right skills at a reasonable price.

According to Gartner's study, 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 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," said 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.

The report states that buyers are increasingly moving work to lower-cost, offshore delivery centres. 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. 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," said Ian Marriott, research vice president at Gartner. "Strong demand is putting a strain on the available Indian labour force, while staff attrition and cost increases remain high.

More sophisticated buyers are seeking a multi-country strategy to minimise risk and align nearshore and offshore delivery centres 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.

According to Gartner, 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.

The trend toward software-as-a-service (SaaS) is gaining the most traction with major software vendors and large internet players, making announcements about new SaaS offerings and mass-customised software platforms. Firms need to realise that the utility delivery model is a viable alternative and they should seriously consider utilities in their sourcing strategies, the report states.