Monday, September 17, 2007

IT outsourcing boom has come and gone, study says

LARGE firms that have fueled the global information technology outsourcing boom and have put developing countries such as India and the Philippines on investors' radar screens are getting to be picky, according to a recent study.

"We do believe that the boom years for IT outsourcing growth have come and gone," said Brian Tumpowsky in a statement. "Buyers are learning to be more selective and strategic in the way they approach outsourcing and, as such, the pace of growth is slowing."

Tumpowsky is co-author of the 2006 Global IT Outsourcing Study conducted by Diamond Management and Technology Consultants (DMTC), a Chicago-based IT management consulting firm.

DMTC's study reveals that buyers are still prematurely terminating contracts, and questioning the value of onshore outsourcing. They are also struggling with the basics of determining what to outsource, measuring effectiveness and managing a global pool of resources.

Buyers are concerned about contract renegotiations, extensions and terminations to seek additional outsourcing opportunities.

In 2006, 8 percent of offshore buyers said they plan to decrease their levels of outsourcing over the next 12 months. This is compared to DMTC's previous study in 2004 in which none of the buyers said they would decrease the amount of outsourcing they were doing.

Firms are reining in outsourcing for three reasons: either they mistakenly outsourced a process or function that is core to their business and are now bringing those back in; their provider over-promised and under-delivered; or, the complexity of managing and measuring outsourcing projects and relationships overshadowed the benefits.

This however does not signal the death knell for IT outsourcing.

DMTC said the industry is alive and will continue to grow well into the future, although at a slower pace.

The pace of growth has declined significantly over the past several years. In 2004, 86 percent of all buyers told DMTC that they were going to increase their level of offshore outsourcing--albeit at a slower pace than in years past. By 2005, that number had slipped to 70 percent and currently sits at an all-time low of 64 percent.

The good news is, overall, the percentage of buyers satisfied with their IT outsourcing decisions remains quite high, with 71 percent of buyers saying they were happy with their offshore providers. In 2005, the offshore satisfaction rate was only 62 percent.

The study polled hundreds of senior executives mainly based in the United States and Europe and studied industry trends over the past 12 months in the areas of spending, buyer satisfaction, outsourcing impact and leadership of the changing outsourcing market.