Outsourcing trend slowing down, study shows

In the US, farming-out IT tasks isn't as popular as it was two years ago, according to a CIO survey

IT outsourcing is still growing but CIOs are no longer shifting IT work to outsourcers as fast as they can. Also, many IT managers now realise they made mistakes in some earlier outsourcing decisions and are bringing work back, according to management consulting firm DiamondCluster’s latest annual Global IT Outsourcing Study.

In a similar survey two years ago none of the executives surveyed by DiamondCluster said they were decreasing their outsourcing. But this year 9% of those who use outsourcing conducted within the US, and 8% of those who turned to offshore outsourcing services, say they plan to cut back on outsourcing this year.

“We’ve seen more people pull back this year than last year, and in 2004 nobody told us they were going to pull back,” says Tom Weakland, who heads DiamondCluster’s global sourcing practice.

The firm surveyed 153 senior executives, mostly CIOs at companies with IT budgets ranging from US$5 million (NZ$8 million) to US$500 million. It has been doing the surveys since 2002, offering some idea of outsourcing trends in this market.

The reasons for the reaction vary, DiamondCluster has found. Some companies moved into outsourcing too quickly and outsourced the wrong things, while others picked the wrong provider, put together bad contracts or just weren’t properly prepared to do it, Weakland says. A few troubled outsourcing deals came to a natural end but Weakland says they represent only a small fraction of outsourcing deals that went sour.

One company that took back some of its IT work this year was Nissan North America, which outsourced IT functions, including business analysis and programme management, in a 1999 deal with IBM that was valued at the time at US$1 billion. Some of those jobs have been brought back in-house, the company disclosed in April.

Still, outsourcing continues to grow, if at a slower pace than in recent years. Almost two-thirds of those surveyed, 64%, say they intend to increase their level of offshore outsourcing in coming months. But that’s still a significant decline from the 86% who said that in 2004.

“It’s still big growth, but it’s not boom growth,” Weakland says. “It’s slow, managed growth of the relationship.”

Some 47% of those taking part in the survey also reported that they had “abnormally terminated” an outsourcing firm or cancelled a contract during the previous year, compared with just 21% in 2004. Most affected where providers operating within the US. Weakland says, “That tells me that buyers are taking a critical look at their relationships”.

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