Enterprise buyers are demanding that IT service providers offer a range of global sourcing alternatives, including on-site, domestic, nearshore (services delivered from an adjacent or nearby country) and offshore capabilities. Nearshore and offshore capabilities are absolute necessities for IT services providers to even compete, according to Gartner, Inc.

"'Despite economic and geopolitical uncertainties, IT service providers with resources in India continue to be the dominant choice for U.S. enterprise buyers with estimates that exceeded $10 billion of IT services delivered in 2002,'" said Frances Karamouzis, research director for Gartner.

"'There are thousands of external service providers (ESPs) around the globe responding to these demands by providing some part of their offerings through a lower-cost labor market, which makes the evaluation and selection process for enterprises more complex,'" Karamouzis said.

Source: "Gartner Says Global Delivery of IT Services is an Irreversible Trend," August 1, 2003

As offshore outsourcing ramps up and the dislocation of IT jobs in the United States continues, CIOs must anticipate the potential loss of talent, knowledge and performance. By year-end 2004, one out of every 10 jobs within U.S.-based IT vendors and IT service providers will move to emerging markets, as will one of every 20 IT jobs within user enterprises, according to Gartner, Inc.

"'To many CIOs and business executives, the decision to outsource activities offshore is fiscally sound - the cost, quality, value and process advantages are well-proven,'" said Diane Morello, vice president and research director at Gartner. "'At a time when IS organizations are struggling with poor credibility and IT is being scrutinized, offshore outsourcing is becoming a tool for improving service delivery and a source of highly qualified talent in greater numbers.'"

Source: "Gartner Says One Out of 10 Jobs in U.S. IT Vendors and IT Service Providers to Move Offshore by End of 2004," July 29, 2003

"'If enterprises that have been developing offshore sourcing strategies over the last few months successfully conclude pilot projects, the growth in offshore BPO during the next couple of years will be significant, as a result of contract expansions and new adopters,'" said Rebecca Scholl, principal analyst for Gartner's sourcing group. "'Organizations have been cautious in their adoption of offshore BPO services, so growth in offshore delivery is expected to be continuous, but moderate compared with the excessive hype around the concept last year.'"

"'Although India has inherent skills related to transaction processing, Indian service providers cannot expect to target the higher value and more lucrative BPO services until they acquire and demonstrate their process skills and industry knowledge to offer process transformation capability,'" said Sujay Chohan, research vice president for Gartner. "'Most of today's offshore BPO opportunity remains at the level of out-tasking a component of a business process rather than outsourcing an entire business process, and is mostly relegated to contact centers and back office transaction processing.'"

Source: "Gartner Says Offshore BPO Industry to Grow 38 Percent in 2003," July 7, 2003

"'Enterprises should consider including a 25 percent acquisition clause into their contract, which allows the enterprise to get out of the contract if the service provider is more than 25 percent acquired by another company,'" said Ted Chamberlin, industry analyst at Gartner. "'The enterprise should also include a competitive pricing clause that forces an ASP hosting provider to match a deal it gave to another enterprise if the enterprise with such a clause in the contract could qualify for the volume commitments.'"

By 2004, 70 percent of enterprises will selectively outsource applications using a variety of application service providers (ASPs), traditional outsourcers, niche applications vendors and offshore providers. However, Gartner analysts said enterprises must use structured evaluation and selection criteria or risk engaging with the wrong ASP offering the wrong level of service.

"'Enterprises entering into an ASP contract should not be doing so without first understanding what is available in the market today,'" said Chamberlin. "'To do this, they need to develop their enterprise needs and requirements, specific evaluation and selection criteria around the services available in the market, and a list of providers competent to deliver to their required service levels.'"

Source: "Gartner Says With Increased Merger Activity in IT Services Industry, It's Crucial for Companies to Negotiate Terms That Address Consolidation Issues," June 25, 2003

Human resources (HR) is the most outsourced business process, with worldwide HR business process outsourcing (BPO)revenue on pace to reach $46 billion in 2003, an 18 percent increase from 2002 revenue of $39 billion, according to Gartner, Inc.

"Best practices and vendor scalability have been proven in HR over time, and enterprises perceive HR BPO options as being less risky and offering good value for money," said James Holincheck, research director at Gartner. "HR is a more mainstream and common BPO undertaking, so inhibitors to its uptake are low compared to other processes."

By 2004, HR BPO is forecast to reach $51 billion and represent 39 percent of all BPO revenue.

The bulk of HR BPO deals in 2003 are priced on a utility basis, while in 2004, there will be more multiprocess deals that emerge. Traditionally, HR outsourcing deals have been low in flexibility, but in 2004 there will be an increased ability to change service levels and adjust process delivery outputs. Gartner analysts said that by 2004, an increasing number of businesses, encouraged by an improving economic and competitive climate, will become mainstream adopters of end-to-end, strategic BPO deals.

Source: "Gartner Says Worldwide HR BPO Market Will Grow 18 Percent in 2003," June 24, 2003

"'Enterprises around the world are attempting to focus their investments on their core business processes and are increasingly looking at outsourcing noncore business processes,'" said Rebecca Scholl, principal analyst for Gartner's sourcing group. "'Early adopters of BPO services, primarily large organizations, continue to expand their relationships to include new process areas, and new technology and media are creating opportunities for outsourcing entire lines of products and services, such as online payroll, online benefits administration, online order management and online transaction processing."

"'Although several large BPO deals of over $1 billion will be signed in 2003, there will be a decrease in growth linked to a period of disillusionment starting in 2004,'" said Scholl. "'2004 corresponds to the five-year mark after the signature of several early BPO 'megadeals'. These deals will be renegotiated, in some instances re-competed, while other late adopters take on a 'wait-and-see attitude'.'"

"'The combination of people, process and technology expertise, as well s the ability to sell to business' buyers will be key in determining a provider's success in this market,'" said Scholl.

Source: "Gartner Says Despite Economic Downturn, Worldwide Business Process Outsourcing Revenue to Increase 11 Percent in 2003," June 10, 2003

"'An important element in many of the megadeals is a focus on IT infrastructure and operations. Many of the mega-outsourcing contracts involve substantial consolidation and centralization of IT assets on a global basis,'" said Susan Cournoyer, principal analyst for Gartner's IT Services group. "'Yet the outsourcing megadeals also represent a look ahead. Outsourcing providers promise to meet IT and business needs through new technology and new business models, particularly the on-demand model that appears to promise relief from fixed costs.'"

Gartner analysts say that while BPO has emerged as one of the fastest growing service opportunities in the financial services market, BPO is not a new service area for financial services - check-processing services have been around for decades, and payment processing showed steady robust growth through the 1990s. What is different now is that BPO is rapidly expanding into areas that were off limits to outsourcing just a few years ago. Increasing acceptance is also driving expansion in the number and scope of deals, which, in turn, increases the market size.

"'Reflecting the industry's price sensitivity, cost ranks higher in IT buyer's decision making in financial services than in other industries,'" said Cournoyer. "'Industry knowledge is also more important to financial services IT buyers, which likely accounts for the trend toward more in-depth verticalization among top-ranked providers.'"

Source: "Gartner Says IT Outsourcing and BPO Are the Fastest-Growing IT Services Opportunities in Financial Services," May 30, 2003

"'While there are substantial costs involved in moving to outsourcing IT service delivery, they pale in comparison to the overall annual value of the deal,'" said Richard Matlus, research director for Gartner's sourcing group. "'Making the investment required to get it right the first time is clearly minor compared to the risks and costs associated with a suboptimal deal.'"

"'By leveraging the expertise of an experienced advisor, it is likely that the internal staff costs and the external legal fees can be cut by as much as half because of templates, tools and methods that speed up the process,'" said Michael Andersen, vice president for Gartner Consulting's strategic sourcing solutions group. "'Even if the investment in an advisor is at the high end of the range, the net cost is basically the same.'"

Source: "Gartner Says Companies Need a Better Understanding of the Costs Involved in Transitioning Internal IT Services to External Service Providers," May 14, 2003

An analysis of IT outsourcing contracts for the past 14 years has shown that the average value of an IT outsourcing contract is $47 million, and the average length of a contract is six years, according to Gartner, Inc.

"'The industries with the largest annual contract value are also the most active in terms of megadeals,'" said Bruce Caldwell, principal analyst for Gartner's sourcing group. "'Financial services boasts at least 17 megadeals, a number matched only by central government. Telecommunications has 12, transportation has 11, manufacturing and aerospace/defense each have eight, and high-tech has seven.'"

"'Tracking IT outsourcing contracts over time can yield useful information. Knowing what companies and outsourcing providers have and have not done in the past can help identify pockets of expertise, as well as pockets of opportunity,'" Caldwell said. "'In addition to tracking outsourcing behavior of major corporations and industries over time, the scale and nature of operations and skills and client base of outsourcing vendors becomes visible through use of a contracts database.'"

Source: "Gartner Says the Average Value of an IT Outsourcing Contract is $47 Million," May 5, 2003

"'Financial services and large corporations are often among the first to try out new business models. Now other vertical markets are formalizing their adoption of BPO, and a number of providers are adapting to the 'verticalization' of BPO demand,'" said Rebecca Scholl, senior analyst for Gartner's IT Services program. "'However, vendors must be cautious in targeting new opportunities and not target every BPO opportunity that comes along.'"

"'BPO providers need to select targeted opportunities. Do not try to be all things to all people in BPO, which is impossible even for the largest BPO vendors,'" said Scholl. "'This mean selecting the appropriate mix, scope of services, countries and industries to target for BPO opportunism may lead to client disillusionment and unprofitable engagements.'"

"'Users can really begin to choose the service provider that is right for their needs, whereas as recently as a year ago, they were very limited in their options,'" Scholl said. "'At the same time, as service providers ramp up their delivery capabilities, they will be less and less interested in acquiring assets and staff from their clients. The market for HR outsourcing will therefore become more challenging for both users and providers during the next three years.'"

Source: " Gartner Survey Shows Business Process Outsourcing is No Longer Just for Large Corporations," April 3, 2003

"'Understanding and choosing what type of relationship best fits an enterprise's business strategy, and the value it wants from the deal, lays the groundwork for all subsequent decisions on how the deal is managed,'" said Linda Cohen, managing vice president for Gartner.

"'The service receiver and the service provider should commit to regularly scheduled, formal meetings to review the progress and achievement of objectives to ensure mutual benefit,'" Cohen said. "'Failing to do this, the relationship can be seriously compromised because corrections are not made in a timely fashion.'"

"'As the enterprise's understanding of multiple suppliers increases, as well as the processes to manage and integrate them, a prime or general contractor approach is beneficial for obtaining a mix of suppliers without the job of managing the suppliers directly,'" said Cohen. "'The single or multisource decision must be made with full recognition of the enterprise's business competencies to manage the relationship, contracts and integration requirements.'"

Source: "Gartner Says Half of ESP Projects Will Be Considered Unsuccessful for Not Delivering Anticipated Value," March 24, 2003

"'Already some of the larger services companies have responded to offshore players in the area of applications support by acquiring or setting up their own offshore delivery capabilities through acquisition or significant alliances with lesser-known players,'" said Allie Young, chief analyst for Gartner Dataquest's IT Services program.

"'As an alternative to Indian offshore, the near-shore outsourcing market, in particular the Canadian provider market, will be considered by global providers as a way to hedge their bets against political unrest and the potential calamity of a regional war in the Middle East,'" Young said.

"'Despite concerns that megadeals in outsourcing were drying up, 2002 saw an above-average number of contracts worth $1 billion or more,'" said Bruce Caldwell principal analyst for Gartner Dataquest's IT Services program. "'We've seen ample evidence that the 10-year deal is no longer the standard, and that multibillion dollar contracts, as well as consortia or alliances of vendors are increasingly common.'"

Source: "Gartner Dataquest Says IT Outsourcing Industry to Advance With Increased Demand in Offshore Outsourcing," January 30, 2003