IT outsourcing boom is over


The boom in companies outsourcing their IT is over, a U.S study has claimed, with organisations now much more likely to think more carefully and strategically before they rush operations overseas.

The study by management consulting firm DiamondCluster International found that while the majority of organisations remained committed to increasing their IT purchasing, numbers overall had decline significantly from previous years.

"The outsourcing market is maturing in fundamental ways," said Tom Weakland, who leads the outsourcing advisory services practice at DiamondCluster.

"Buyers are learning to be more selective and strategic in the way they approach outsourcing decisions, which is tempering the buying process.

"Many buyers are reaching the mid to final stages of current outsourcing contracts and find themselves distracted from focusing on new initiatives.

"And many buyers are telling us they have already captured the 'low hanging fruit' and are slow to seek out additional outsourcing opportunities," he added.

In the company's 2004 survey none of the study participants said they would decrease the amount of outsourcing they were doing.

But this year, almost one in 10 (nine per cent) of the buyers of onshore services and eight per cent of offshore buyers said they planned to decrease their levels of outsourcing in 2006.

"Companies 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 it back in-house; their provider over-promised and under-delivered; or the complexity of managing and measuring outsourcing projects and relationships overshadowed the benefits," Weakland said.

"This is by no means the death knell for IT outsourcing. However, the boom years for growth have come and gone," he added.

Almost half of buyers reported that they had abnormally terminated at least one outsourcing relationship in the past 12 months

"This should serve as a wake-up call for outsourcing providers that all is not well with their customer relationships and that they need to refocus on quality, clarity and measurement," he continued.

Large IT outsourcing firms could be expected to look towards mergers and acquisitions as a means of building scale, tapping into the global pool of talent and adding to their current suite of offerings, the survey suggested.

Almost half (47 per cent) of buyers reported that they had abnormally terminated at least one outsourcing relationship in the past 12 months, with poor performance cited as the main the reason for the termination.

Despite the overall trend, India remained the most popular destination for outsourcing among U.S business, although Canada was making headway.

Many organisations were beginning to feel that the higher cost of outsourcing to Canada was worth the gains in proximity, language and culture.

China had also simultaneously emerged as the contender to challenge India in the years to come.

Major outsourcing hubs in India, including Bangalore, Chennai, and Hyderabad, were reaching labour saturation and are desperately looking for educated resources in other locations, it added.

India providers were therefore building technology centres in less well-known locations such as Kolkata, Mysore, and Chandigarh.