Outsourcing market reaches 'tipping point'

The outsourcing market has reached a "tipping point" with regard to utility delivery models, and change and innovation will take hold and accelerate through 2008 and beyond.

Analyst firm Gartner explained that more providers are developing utility-based offerings across infrastructure, application and business process domains.

"The trend toward software-as-a-service is gaining the most traction," Gartner stated.

"Major software vendors, such as Microsoft and SAP, and large internet players, such as Google and Amazon, are announcing new offerings and mass-customised software platforms.

"User organisations need to realise that the utility delivery model is a viable alternative to traditional outsourcing, and should seriously consider utilities in their sourcing strategies."

The analyst firm noted that the global outsourcing market continues to grow at a steady pace, with a forecast growth rate of 8.1 per cent in 2008.

However, Gartner warned that healthy growth rates for outsourcing do not necessarily mean that organisations signing up for such services will always get a good deal.

"User organisations often have fundamentally sound procurement organisations to initiate outsourcing contracts," said Kurt Potter, research director at Gartner.

"But many IT sourcing strategies and governance structures are still immature, and are lacking altogether, or misaligned with, enterprise objectives. "

Potter added that, because these organisations lack the basic building blocks for successful vendor management and outsourcing success, the expected cost savings and other benefits are difficult to obtain.

"In extreme cases, the lack of trust and control to optimise the outsourcing relationship results in deal failure," he said.

"Also, more organisations focus 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."

Gartner maintained that, although outsourcing continues to grow, publicly reported IT outsourcing and business process outsourcing contract values decreased overall by 50 percent in 2007.

Part of the explanation for this apparent discontinuity is that there is less publicity about deals as the outsourcing market matures and becomes more commonplace.

Companies are outsourcing more, but electing to use a multi-provider strategy, and more deals are simply not large or ground shaking enough to report.

"In 2008, we expect to see some early adopters of multi-sourcing 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 multi-sourcing 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."

Potter added that buyers are increasingly moving work to lower-cost, offshore delivery centres.

Although cost remains a major driver for global delivery models, 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 global delivery models.

Indian providers are growing approximately 40 per cent annually in the US and 60 per cent annually in Europe .

Although spending on offshore services is three times higher in North America than in Western Europe , the gap is closing.