Large-scale outsourcing on the way out: Gartner

According to Gartner's Predictions for Outsourcing in 2004 report, organisations are moving away from the multi-year, multi-billion dollar contracts that have been the standard for institutions such as Telstra, the Commonwealth Bank and the South Australian government in the past, indicating they are now more likely to contract individual sectors to outside providers.

All-inclusive outsourcing deals have proven to be a costly venture for enterprises, with companies such as EDS having forged long-term contracts worth hundreds of millions of dollars with the South Australian government and IBM Global Services Australia taking a big slice from Telstra last year in fulfilling its 10-year contract.

Gartner says the trend towards smaller contracts has important implications for external service providers (ESPs), as a greater number of specialised outsourcing deals will create new opportunities for smaller niche vendors.

Linda Cohen, managing vice president for Gartner, says the trend could also have implications for larger ESPs as to respond effectively to the trend, she says, they will now need to focus on marketing their core services and distinguishing their business values.

"They [large ESPs] 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," suggests Cohen.

Gartner predicts overall outsourcing relationships will rise by 30 percent in 2004, with many new enterprises outsourcing small projects for their first time before moving into larger global contracts with vendors.

However, Cohen warns that not every enterprise is sufficiently prepared to manage outsourcing relationships effectively.

"Outsourcing requires an ongoing relationship that has to be managed proactively and measured to achieve what is expected," said Cohen, adding "They [enterprise executives] have to collectively define and manage expected business results in any new management model that results from outsourcing. Outsourcing is hard work, and it takes a lot of preparation".

Gartner says services such as IT, human resources, finance, accounting, procurement and customer care will continue to be the main sectors of outsourcing in 2004, however Cohen says enterprises are constantly redefining which services should remain in-house and which can be better managed by an outside agency.

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