The global outsourcing market continues to grow at a steady pace, with a forecast growth rate of 8.1 percent in 2008. But healthy growth rates for outsourcing do not necessarily mean that user organizations are without challenges.
"Although user organizations often have fundamentally sound procurement organizations 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 organizations 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 organizations 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: 18.22, -0.14, -0.76%) contract values decreased overall by 50 percent 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," said Mr. Potter. "Because of multisourcing complexities often associated with handoff points between competing providers and unclarified vendor management processes, some organizations will consider prime-contractor outsourcing models or the appointment of new vendor management roles in their retained organizations."
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 percent annually in the U.S. and 60 percent 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," said 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 organizations need to realize that the utility delivery model is a viable alternative to traditional outsourcing, and they should seriously consider utilities in their sourcing strategies.
Additional information on what happened in outsourcing in 2007 and what Gartner expects in 2008 is available in the Gartner report "Gartner on Outsourcing, 2007-2008." The report is available on Gartner's Web site at www.gartner.com/ DisplayDocument?ref=g_search&id=560809&subref=simplesearch. (Due to the length of this URL, it may be necessary to copy and paste this hyperlink into your Internet browser's URL address field.)
Gartner analysts will further discuss outsourcing trends at the Gartner Outsourcing Summit, taking place May 19-21 in Washington, D.C. The Gartner Outsourcing Summit is the only event that provides a comprehensive view of the entire outsourcing market -- infrastructure, application and business process outsourcing, global delivery and the use of offshore providers, as well as issues and trends about new delivery models, such as software as a service. The Summit provides unbiased, road-tested advice and best practices necessary for setting outsourcing strategies and objectives, evaluating and selecting the right service providers and managing relationships with them. Many of the 50-plus content sessions will feature case studies and panel discussions presented by end users and industry professionals. For complete event details please visit the Gartner Outsourcing Summit Web site www.gartner.com/us/outsourcing.