One in five outsourcing deals are terminated

One in five organisations outsourcing their IT has terminated the contract during the last year after failing to get the expected benefits, according to a new study.

But the study of 182 IT outsourcing buyers in the US claims the overall level of satisfaction has increased as the market matures and IT bosses have more realistic expectations.

Almost three-quarters (74 per cent) said they are happy with their IT outsourcing efforts to date and out of the 21 per cent who terminated a deal in the last 12 months, half of those simply switched to another vendor. Only a quarter of those who terminated then brought the work back in-house.

The study was last done in 2002 by consultancy DiamondCluster International when buyers expected cost savings in the region of up to 50 per cent. The new figures found those expectations have declined to 10 to 20 per cent, along with the rates they are paying to outsourcing service providers.

Buyers have moved on from the "outsourcing euphoria" of 2002 and 63 per cent said they are taking a more incremental approach by starting small and only scaling the scope after seeing tangible value.

The report said: "IT outsourcing has all the characteristics of a maturing business. Executives have become more realistic in their expectations and are now more likely to implement outsourcing initiatives incrementally."

The rise of offshore outsourcing is also a major trend to emerge from the study with 86 per cent of the buyers expecting to increase their use of offshore service providers in the next 12 months.

"Despite some high-visibility setbacks and backlash from politicians and the public, corporate IT executives say outsourcing, both onshore and offshore, is here to stay. Simply put, offshore outsourcing of IT functions has reached the mainstream," the report said.

Offshore fears have also shifted over the last two years from financial benefits and quality of the service to the backlash with 84 per cent concerned about backlash from employees and their potential to purposefully undermine offshore relationships.

Separately, Indian IT outsourcing body Nasscom has outlined plans to increase privacy and data security protection for offshore outsourcing facilities in the country following recent high-profile security breaches. These include security zones and police check-points in key cities that could be used to instantly close main roads in the event of an incident.