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Outsourcing Deals: More But Smaller

Gartner says the number of outsourcing deals is expected to rise 30% this year, but that the deals will be smaller and more sharply focused.
The trend in outsourcing deals is toward smaller agreements focused on specific business objectives, rather than the full-service, 10-year, multi-billion-dollar contracts that dominated the industry in the past, a market-research group says.

As a result, the number of new outsourcing deals is expected to increase by 30% this year, opening up the market for more vendors—a trend that's expected to benefit smaller vendors, Gartner said Thursday. "Smaller vendors, especially, will have new opportunities to compete in specialized niches," Gartner analyst Linda Cohen said in a statement.

Larger vendors, on the other hand, will need to focus on marketing their core services and differentiating their business value, Cohen said. The vendors, for example, should propose more risk-based pricing, such as performance contracts in which total payments depend on business results, rather than technology performance.

"Many first-time outsourcers will look at outsourcing a set of applications first, and then move to outsourcing more (business) processes," Cohen said. "Some enterprises will be outsourcing for the first time to tap into a vendor's global-sourcing option."

For larger companies, Gartner recommends that C-level executives develop a consensus on specific business objectives and a method for measuring performance before signing outsourcing contracts. Outsourcing programs change the operating model of an enterprise, so they also require commitment from all senior business executives. "Outsourcing is hard work, and it takes a lot of preparation," Cohen said.

The main outsourcing segments are expected to continue to grow this year. Those segments include IT, human resources, customer care, finance, accounting, and procurement.

"Once enterprises outsource, few of them take operations back in-house," Cohen said. "Satisfactory outsourcing relationships encourage enterprises to analyze the longer-term benefits of outsourcing. This often leads them to pursue these benefits in other operations."

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