Research giant Gartner Group has forecast a growth rate of 8.1 percent for the global outsourcing market in 2008. However, this healthy, if unspectacular growth does not necessarily mean that user organizations are without challenges, analysts warned.
“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."
This chimes with a growing view across many industry sectors that the underlying theme over the next few years must be solid governance and sound management, particularly in a time of economic and political uncertainty across the globe. "In extreme cases, the lack of needed trust and control to optimise the outsourcing relationship results in deal failure," continued Potter. "Also, more organisations 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.”
Despite the apparently healthy 'big picture' in terms of overall growth, Gartner sounded further notes of caution about key aspects of the industry. For example, publicly reported IT outsourcing (ITO) and business process outsourcing (BPO) contract values decreased overall by 50 percent in 2007, said the report. One explanation for this apparent discontinuity is that as the outsourcing market matures and becomes more commonplace, there is less publicity about deals, according to the report's authors. However, more likely is the fact that greater numbers of companies are using a multi-provider model rather than a single, large outsourcing partner. Within a multi-sourcing environment, individual deals are often too small to attract publicity – it's not a market that is regarded as sexy when looked at through the greenback-tinted spectacles of the traditional IT industry.
Potter confirmed this suspicion, and added: “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."
Gartner's report indicates that buyers are increasingly moving work to lower-cost, offshore delivery centres. Although cost remains a major driver for global delivery models (GDMs), more mature users are seeking ways to better support their business needs.
This tallies with the findings of a recent EquaTerra report (see separate story), which identifies several emerging themes within companies' decisions to outsource, including innovation, risk avoidance and flexibility. Like EquaTerra, Gartner also saw Indian providers gaining traction in Europe in 2007, but Gartner believes they are now facing strong competition from more-established global vendors. (EquaTerra's report, however, found very high satisfaction levels with many Indian companies.) Indian providers are growing approximately 40 percent annually in the US and 60 percent annually in Europe, according to Gartner's research.
Although spending on offshore services is three times higher in North America than in Western Europe, the gap is closing, continued the report. “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 labour 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 centres accordingly. More sophisticated buyers are seeking a multi-country strategy to minimise risk and align nearshore and offshore delivery centres with their primary timezones. 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.
Gartner has thrown its weight behind the idea that outsourcing in its purest form is far from the only means of minimising risk and moving non-core and service functions away from the centre of the organisation. The trend toward software-as-a-service (SaaS) is gaining both credibility and significant enterprise customers, 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-customised software platforms. However, Gartner does not acknowledge that the SaaS market is one sector in which a number of influential smaller providers punch above their weight, with companies such as Salesforce.com gathering large, and highly vocal corporate supporters. Indeed, Salesforce.com is very much the long tail wagging a large industry dog. "User organisations need to realise that the utility delivery model is a viable alternative to traditional outsourcing, and they should seriously consider utilities in their sourcing strategies," advises Gartner.
