And the good news for outsourcing providers is?

A new year - and more of the same for outsourcing providers: tough times. Outsourcing adviser TPI says the final quarter of 2006 was the worst quarter in five years, in terms of the total value of contracts awarded. The value of new market contracts declined by 8 per cent on 2005 levels.

Plucky and picky users are choosing to be more selective, creating effective multi-sourcing strategies that rely on a broader range of providers and contract types. The facts suggest a number of trends - short-term deals, increasing competition and more specialisation:

• The move towards specialist and short-term contracts continues unabated, with 350 contracts awarded in 2006 - beating last year's record of 341
• Competition is increasing and the number of providers winning contracts has risen by 64 per cent in the last four years, from 55 in 2002 to 90 in 2006
• The big six outsourcing providers (Accenture, ACS, CSC, EDS , HP and IBM) are winning a decreasing proportion of deals valued at more than $50m and their share of the total global market has fallen dramatically from 71 per cent in 2002 to 46 per cent in 2006
• At the same time, new entrants are benefiting from increased specialisation in sourcing. Indian-based providers, such as Wipro, Tata and Infosys, are encroaching upon the big six's share and achieved seven per cent of the total market share in 2006, compared to less than a half a per cent in 2002

So, while the total market share is falling, Indian-based providers are continuing to mop up an increasing proportion of available deals. Far from being just a cost-cutting option, selective offshoring is now seen as a viable alternative to departmental outsourcing with a big ticket name.

No mention of the Ukrainian market (The Knowledge, 14 December) in the TPI figures, however. Maybe it was an oversight by the adviser...

Comments

[Peter Armstrong]

Mark
Interesting - several things occur to me:

1.Old-style outsourcing contracts were great in year 1, iffy in year 2 and pretty dire in year 3 (for the recipient) because there was no motivation for the outsourcer to improve the service. After all they have to make a profit. New-style contracts are coming (and some outsourcers are ahead of others) and these are based on services rather than technology, and the constant improvement thereof. In other words we are (at last) getting to real SLAs rather than meaningless technical metrics. The fact that you ran 565 backups for me last night and used 13.7% of a UNIX server is frankly totally uninteresting. The fact that you enabled my customers to walk up to a web-browser/shop/agent or whatever and buy stuff from me is far more interesting. Which leads to:

2.The intelligent IT department has to sell its worth rather than its cost; it has to show and prove its value to the business rather than be perceived as a cost centre. It is important for IT staff to emphasise the number of transactions handled each week and the value to the company of those transactions rather than talk about, say, the availability of a particular server, DB or application. It’s about time that IT departments began explicitly selling back their value to the board. Then they might not get outsourced in the first place!

3.And last, but not least, people make outsourcing decisions for the wrong reasons. Outsourcing the help desk at a price per incident of half what it would cost in-house is to miss the point. Every call to a help desk represents a mistake. What the IT department should be doing is removing the incidents altogether. That is not likely, but the intelligent IT department would put in place routine case analysis and problem management to reduce the overall number of incidents, and a business-relevant prioritisation mechanism. They would also check back with the user community to see if they are happy with the service provided. India may be cheaper, but are they motivated to reduce the number of incidents?

Personal view is that selective multiple outsourcing will be the way of the future - get rid of what you are not good at to an expert and home in on the core stuff you excel at, but look very closely at how you measure/pay the provider.

[Peter Armstrong]

Sorry, forgot to say who I am in comments - Corporate Strategist for BMC Software
Cheers
Peter

[Mark Samuels]

Hi Peter - thanks for the comments.

With regards to point one, it would be good to think that more organisations are paying closer attention to SLAs. Benchmarking has always been a key issue in the outsourcing industry - and some firms are really beginning to take note (such as Prudential). If users stipulate more specifically when they want something and how, they will start to get better service.

Second, perception is still a real problem for the IT organisation, particularly when it comes to value. As I mentioned in a post recently, analyst Gartner suggests that spending initiatives are largely funded on the perception of the value expected. If you can't convince the board that you - and your projects - are worth it, you will indeed be outsourced...

Finally, and with regards to point three: spot on. Too many outsourcing decisions are made with cost decisions in mind alone. And too many post-decision metrics fail to consider the real value of the service - such as has customer service improved, or is the business more efficient? I guess it all comes back to SLAs and benchmarking.

All the best,
Mark