IT Outsourcing Increases

The increase in outsourcing relationships – both domestically and abroad – are most prevalent among the IT executives purchasing outsourcing services. Nearly three-quarters (74%) of buyers are satisfied with their outsourcing efforts to date and 64% expect their use of IT outsourcing to further increase over the next 12 months. By comparison, only 21% of outsourcing buyers have terminated an outsourcing arrangement in the past year, according to global management firm DiamondCluster’s 2004 Global IT Outsourcing Report.

Examining the cost benefit potential, most buyers in the examination of outsourcing relationships expect efficiency gains between 30% and 40%, down from the 50% range reported a couple of years ago. Yet, while expectations have declined, so too have the rates they are paying in the past 12 months, many buyers report, particularly in the areas of application development, maintenance and support.

“The organizations we studied make it clear that outsourcing is on the rise. They are making strides in getting the most from their outsourcing relationships and are looking forward to further commoditization and competition among the service providers, said Tom Weakland, leader of the outsourcing advisory services practice at DiamondCluster said in a news release.

That is not to say outsourcing jobs is without risk. Among those canvassed 85% of buyers and 81% of providers are concerned that legislation or political pressure might prevent them from taking advantage of the wage arbitrage opportunities associated with offshore outsourcing. Similarly, 84% of buyers and 82% of providers said they are concerned about backlash from employees as jobs are lost to offshore outsourcers.

“There are still plenty of risks, not the least of which is backlash from their stakeholders,” Weakland added. “But those that outsource effectively have learned some important lessons. They recognize outsourcing is only one of many tools in a successful sourcing strategy. They are realistic about the value that IT outsourcing can deliver. Most importantly, they are learning about the importance of applying structured management discipline to all phases of the relationship.”

Copies of the study are available on request by sending e-mail to: outsourcingstudy@diamondcluster.com.