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The beginning of the end for outsourcing?

Dave » 17 years 29 weeks ago

Is the IT outsourcing boom over? One independent study seems to think so.

From one article that nicely summarizes:

Companies are reining in outsourcing since they either 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, reasons [a principal at the management consulting firm that produced the study].

However, other findings, and indeed industry opinion, say otherwise.

“We expect offshoring volumes to go up. India remains a hot destination and other countries (read competitors) will find it difficult to match the scale,” [says a principal at one Indian firm].

[A] leading sourcing advisory firm, too asserts the growth in offshore outsourcing is evidenced by impressive gains for the Indian service providers – whose market share has risen to 5.2 per cent of the total value of contracts signed so far in 2006, up from less than three per cent in 2005 and just over one per cent in 2004.

The size of deals the Indian service providers are winning is also increasing – up by 25 per cent […].

[A recent Forrester study] noted the interest in offshore held steady and concluded that applications outsourcing would help make 2006 a good year for service providers.

A recent Mckinsey study, too, states: “In the past two years, constraints on the offshoring of infrastructure have started to ease…”

One CEO of a prominent US-based firm thinks we aren’t even close to hitting the peak.

From that interview:

The amount of IT outsourcing is small right now. The global IT spend is $400 billion to $500 billion a year. Some of that can’t be outsourced. The addressable market is about $200 billion. But the current value of IT outsourcing is about $20 billion a year.

As I’ve wrote about in the past, certainly outsourcing is a key part of a long-term strategy, and is not just about labor arbitrage. Outsourcing will inevitably rise as more organizations realize the realities of an increasingly integrated globe, and choose to tap into the benefits of making it a part of an overall strategy.

At least this IBM outsourching chief agrees:

It used to be only about cost, but now clients want not just cost, but business performance and processes innovation. That’s primary. It’s now across the board.

Certainly there are enormous challenges to overcome as outsourcing gets easier and more effective. As the issues get worked out and we adapt as an industry, outsourcing will only continue to boom. In fact, it will simply become the new way of business — the importance of characterizing the tactic of “outsourcing” will fade and we’ll be talking about the “business boom” instead.

Updated for clarity.