Study: Outsourcing Boom Is Over

A new study finds that the outsourcing boom is coming to a close due to experienced customers becoming more savvy and picky about the work they hand to outsourcing providers.

The outsourcing boom has passed and maturity is setting in, according to a new study from consulting firm DiamondCluster International in Chicago.

The leveling off is due in part to experienced customers becoming more savvy and more picky about the work they hand to outsourcing providers.

The reticence on the part of some customers is due to disappointment with the performance of their outsourcing providers, the study found.

"I expected the abnormal termination trends to go down, but they remained pretty high," said Tom Weakland, leader of the outsourcing advisory services practice at DiamondCluster. Abnormal terminations occur when customers scrap a contract before its scheduled completion date.

Premature contract terminations, particularly with onshore providers, continue to be a prevalent trend, he noted.

The study found that 47 percent of buyers reported they had prematurely terminated at least one outsourcing relationship in the prior 12 months.

Only 28 percent of buyers terminated at least one offshore deal, but 42 percent of onshore customers had done so. Of those, 53 percent cited poor performance by their onshore provider.

In addition, customers also questioned whether theyre receiving value from onshore providers, Weakland said.

"Theres negativity building in onshore versus offshore. We see more people terminating onshore deals in order to put things offshore," said Weakland.

He said offshore providers are seen as more attractive because they can increasingly boast certifications, such as CMMI, to go with their significantly lower costs.

The disaffection is leading to an overall decrease in outsourcing spending. In the 2004 DiamondCluster survey, no respondents said they would decrease their outsourcing spending. However, this year, 9 percent said they would decrease their spending, although most buyers do remain committed to increasing their purchasing.

/zimages/4/28571.gifClick here to read about how Russia is getting into the outsourcing game.

This years study findings echo those of DiamondClusters study a year ago, which found dissatisfaction among customers who chose the lowest-priced bidder and found that early contract terminations were way up.

The 2005 survey found that many customers were looking seriously at China as an offshore outsourcing destination, a trend that continues this year, according to Weakland.

However, this years survey also shows strong interest in Canada as an offshore location. In addition, Eastern Europe emerged as the second fastest-growing offshore destination, behind China.

Despite the turnoff overall, Weakland said that U.S. IT managers are adapting to outsourcing and gradually implementing it as a comprehensive corporate strategy, rather than as individual contracts for distinct IT tasks.

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