In-Depth

IT Outsourcing Faces Paradigm Shift

Increasingly, organizations are turning to IT outsourcing to enhance business outcomes instead of simply to control or reduce costs.

• By Stephen Swoyer
• 03/11/2008

Market watcher Gartner says organizations are increasingly turning to IT outsourcing -- what it calls ITO -- to enhance business outcomes instead of simply to control or reduce costs. Ironically, Gartner and other researchers have been touting a similar trend toward ITO -- to enhance business operations or performance -- for several years. More than two years ago, Gartner vice-president Linda Cohen admonished corporate executives for "knee-jerk" outsourcing behaviors, saying that many companies were outsourcing for the sake of outsourcing -- i.e., for the perceived (but by no means demonstrable) cost-cutting benefits -- instead of outsourcing when and where it makes sense.

Perhaps C-level decision makers finally understand Cohen's message. Gartner's 2007 survey of 750 IT and outsourcing executives in North America, Asia/Pacific, and Europe found that more than two-fifths (41 percent) of organizations were outsourcing IT as a means to enhance business outcomes or performance.

Cost-cutting is still the prime driver -- approximately 47 percent of organizations identified controlling or reducing costs as the primary benefit of IT outsourcing -- but Gartner thinks a definite "shift" is occurring. In 2005, only 28 percent of respondents cited a desire to enhance business outcomes or performance as a benefit of IT outsourcing. That' amounts to a 19 percentage point uptick in just two years. The upshot, Gartner researchers say, is that the pressure is on outsourcers to establish their business-outcome or performance-boosting bona-fides.

"Cost issues remain strong, and the shift in buyer expectations toward viewing ITO as a means to enhance operations is a sign of a maturing market that has higher expectations from ITO providers," said Allie Young, vice president and distinguished analyst at Gartner. "In addition to cost competitiveness, providers must create a vision for outsourcing that accentuates other business or IT impact to appeal to a maturing buyer set that will eventually seek more value."

Not surprisingly, most outsourcers expect to increase their use of outsourced services over the next two years: on a global basis, Gartner says. Fully 88 percent of current outsourcers anticipate moderate or high levels of outsourcing activity -- compared with just 67 percent last year. Over the next two years, 89 percent of North American organizations anticipate outsourcing at high or moderate levels (that's up from 67 percent last year), according to Gartner. "The appetite to outsource is a compelling reason for providers to concentrate on and ensure their current client base is well-served, satisfied, and continues to see progress in reaching their outsourcing goals," said Dane Anderson, research director at Gartner, in a statement. "Furthermore, IT outsourcers must keep a close watch on changing buyer needs in their ITO deals and vigilantly monitor how buyer's goals and objectives may be changing from ITO as a pure cost takeout measure to greater expectations for IT enhancement in contributing to the optimization of business operations."

Outsourcing isn't a complete slam dunk, of course: North American and Asia/Pacific firms, for example, cite the usual concerns -- namely, data privacy and security -- as top outsourcing inhibitors. Organizations in Europe, the Middle East, and Africa are more likely to be concerned about loss of control.

"Providers need to understand what the likely potential fears, uncertainties, and doubts that their prospective and current clients have when considering or making their outsourcing decision," Young said. "Providers must value their current client base as an important growth opportunity and the ones that can proactively address the most-common concerns will be better-positioned for future growth."