Gartner: 2004 will see trend toward smaller, focused outsourcing projects

Small projects – and possibly small providers – will be a central theme in the outsourcing climate for the coming year, according to a report issued last week by Gartner.

The emerging trend in outsourcing is toward smaller agreements with specific business objectives and away from the full service, multi-year, multibillion-dollar deals that have prevailed for many years, according to Gartner. The number of enterprises that enter into new outsourcing relationships will increase by 30% in 2004, Gartner said, but these relationships will be for smaller, more focused projects.

The trend toward smaller contracts has important implications for large and small vendors that compete in the IT outsourcing market, according to Linda Cohen, managing vice president at Gartner. “If deals are smaller and there are more of them, this opens up the market, creating new opportunities for more vendors,” said Cohen. “Smaller vendors, especially, will have new opportunities to compete in specialized niches.” Smaller vendors should look to establish their brands in specific areas or project types, enabling them to compete more effectively with larger providers, Gartner said.

Larger outsourcing service providers will also need to adapt their strategies to fit the new trend, Gartner said. The major providers will need to focus on marketing their core service offerings and differentiating their business value, according to the report. For example, they 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.

“Many first-time outsourcers will look at outsourcing a set of applications first, and then move to outsourcing more processes,” Cohen said. “Some enterprises will be outsourcing for the first time to tap into a vendor’s global sourcing option.”

Although more enterprises will outsource operations this year, not every enterprise is adequately prepared to manage and execute these programs successfully, Gartner said. C-level executives should collaborate and develop a consensus on specific business objectives before signing outsourcing contracts, the research firm advised. Outsourcing programs change the operating model of an enterprise, a step that should involve the commitment of all senior business executives.

“Outsourcing requires an ongoing relationship that has to be managed proactively and measured to achieve what is expected,” Cohen said. “This is the responsibility of the C-level executives. They 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.”

Business process outsourcing functions – such as IT, human resources, customer care, finance, accounting and procurement – will continue to be major growth segments in 2004, Gartner predicts. These functions once were viewed primarily as in-house functions, but many enterprises are re-defining what technologies and processes must be managed in-house as they try to create economies of scale and enable growth.

“Processes, such as IT, HR and customer care, are increasingly being classified as support services that can be delivered by an (outsourcing provider),” Cohen said. “Once enterprises outsource, few of them take operations back in-house. Satisfactory outsourcing relationships encourage enterprises to analyze the longer-term benefits of outsourcing. This often leads them to pursue these benefits in other operations.”

Additional Gartner data is available in the report “Predictions for Outsourcing in 2004.” The report identifies and examines the top trends in outsourcing in 2004 and gives action recommendations for enterprises considering outsourcing this year. This report can be purchased on Gartner’s Web site, http://www.gartner.com