Outsourcing deals up in number, down in value

Huge outsourcing deals are on their way out, according to new research from Gartner.

On Thursday, the research firm predicted a shift away from full-service, 10-year, multibillion-dollar outsourcing deals for technology service providers. In the future, the trend will be toward smaller outsourcing agreements with specific business goals, Gartner said. Outsourcing refers to the farming-out of work such as IT tasks or business functions like customer service.

Gartner also predicted that the number of businesses starting new outsourcing deals will grow by 30 per cent this year.

As a result, suppliers of outsourcing services - which include Accenture, EDS and IBM - may have to adjust, Gartner suggested.

"If deals are smaller and there are more of them, this opens up the market, creating new opportunities for more vendors," Linda Cohen, Gartner managing vice president, said in a statement. "Smaller vendors, especially, will have new opportunities to compete in specialised niches."

Large outsourcing providers will need to focus on "marketing their core service offerings and differentiating their business value", according to Gartner. The research firm said large outsourcers should propose more "risk-based pricing", such as performance contracts in which the total payment is dependent on business results rather than measurements of how technology performs.

The notion that outsourcing megadeals are waning runs counter to a recent report from market analysis firm Datamonitor. Datamonitor said its IT Services Contract Tracker - which follows new outsourcing, systems integration and consulting deals worth more than $1m - found that the number of deals with a value greater than $100m increased by 49 per cent to 244 last year and deals worth more than $1bn more than doubled to 29.

Advocates of outsourcing argue that it allows companies to focus more on their core business rather than having to take care of such things as software, human resources or accounting. Another lure of farming out tasks is that it can trim a company's costs.

Outsourcing can involve sending work to lower-wage locales such as India or the Philippines. That practice has become a hot topic for technology workers, who have faced major layoffs in recent years.

Gartner warned that not all companies are ready to manage outsourcing programs effectively. "Outsourcing requires an ongoing relationship that has to be managed proactively and measured to achieve what is expected," Cohen said. "Outsourcing is hard work and it takes a lot of preparation."

Ed Frauenheim writes for CNET News.com.