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3/26/2004
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Execs Say Offshoring Likely To Keep Growing

IT management consultant DiamondCluster says 86% of executives surveyed expect the use of offshore outsourcers to increase in the next year.

The burning political issue of offshore outsourcing is likely to get hotter if buyers and sellers of these services are men--and women--of their word. Eight-six percent of executives surveyed by IT management consultant DiamondCluster International say they expect the use of offshore IT outsourcers to increase in the next year. Two years earlier, just one-third of corporate executives surveyed felt that way.

The study, released Friday, says IT outsourcing--domestic and offshore--maintains all the characteristics of a maturing business, with companies more likely to implement outsourcing initiatives incrementally as executives become more realistic in their expectations.

DiamondCluster interviewed 182 executives who either have outsourced or plan to acquire outsourcing services in the next year. In addition, the company interviewed 209 executives from outsourcing services providers.

According to DimondCluster's analysis of survey data, the outsourcing euphoria seen in the past few years has been replaced with a focus on sourcing as a business enabler. While reducing costs remains the No. 1 reason companies outsource IT services, the analysis says, freeing internal resources to focus on more critical initiatives has emerged as a key factor fueling the outsourcing trend.

Still, survey respondents expressed much concern over the potential backlash to their increased use of outsourcing. Eight-five percent of IT users and 81% of IT providers surveyed said they're concerned that legislation or political pressure might prevent them from taking advantage of the wage arbitrage opportunities associated with offshore outsourcing. In addition, 84% of users and 82% of providers say they're worried about employee anxiety over job losses associated with outsourcing. Of particular concern to some employers, according to the analysis, is the potential for employees to purposefully undermine offshore relationships.

The risk of global instability is another significant concern, with 79% of buyer participants and 69% of providers. Negative publicity is also an issue, particularly with providers--72% of whom were somewhat or very concerned about their reputation for taking U.S. jobs overseas.

"It is clear that senior management wants to take advantage of the benefits that outsourcing can offer as part of a sound sourcing strategy but they are engaged in a balancing act to ensure that they don't get locked into deals that might be threatened by new legislation, boycotts or employee sabotage," DiamondCluster's analysis states. "We believe the response to these risks will include building more flexibility into shorter-term deals, outsourcing more to onshore service providers or to take a wait-and-see attitude. One thing is certain, however. Decision-makers understand that managing the backlash amongst their various stakeholders is a serious issue for any company that's outsourcing today."

According to DiamondCluster, the shift in perception about the risks of outsourcing is additional proof of a maturing industry. In its first outsourcing study two years ago, respondents identified uncertain financial payback and the quality of the outsourcer's work as key risks. Today, IT users say they're are more concerned about ensuring the effectiveness of their outsourcing investments as well as managing remote resources.

"As jobs and entire functions ebb further away from management's direct control," DiamondCluster's analysis says, "executives are becoming more aware of the inherent risks and complexities of managing outsourcing relationships."

Among the other key findings:

* 74% of buyers are satisfied with their outsourcing efforts to date.

* 64% expect their use of IT outsourcing to further increase over the next 12 months.

* 21% of buyers say they've prematurely terminated an outsourcing arrangement in the last 12 months.

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