CRN | Outsourcing, Offshoring | Outsourcing Contracts Up, But Savings Questioned

And the stories go on and on. It seems that we’ll soon have the Big Six of oursourcing, like we had the big six of accounting. And eventually, there will be six IT operational models as defined by each of those companies to distinguish themselves from their competetiors instead of industry wide recognized models like ITIL, ILM, etc. Also, it seems to me that that the question of outsourcing to save 15% over the life of the contract is questionable if additional funds and resources are needed just to validate that 15%…

 More companies are outsourcing than ever before, but they may be saving a lot less from the process than anticipated, according to a newly released market survey.

In its quarterly review of the IT and business process outsourcing market, advisory firm Technology Partners International found that the total value of all contracts worth more than $50 million signed in the first quarter of 2006 increased 173% year-over-year to $22.7 billion. And a record number of 83 new deals were signed in the quarter, TPI said.

The research firm also found that the value of contracts in the pipeline, deals that are out for bid but have yet to be been signed, increased 39% year-over-year to $22.6 billion. TPI released its findings on Wednesday.

But while more firms are turning critical IT and business functions like help desk support and customer service over to third parties, who in turn often send the work to subsidiaries in low-cost countries like India or China, they are saving less from the process than is widely believed. In India, programmers and service workers are paid anywhere from 80% to 40% less than their U.S. counterparts. However, the overhead associated with outsourcing appears to be eating up the bulk of those savings. Factoring in transition, legal, advisory and management costs, outsourcing typically lets a company reduce the expense of a particular function by 15%, TPI says.

TPI also found that fewer vendors are getting a bigger share of the outsourcing market, raising the possibility that the highly fragmented services industry is beginning to consolidate. In first quarter of 2006, the six largest vendors—Accenture, ACS, CSC, EDS, Hewlett Packard, and IBM—received 52% of worldwide outsourcing revenue, up from 47% in the previous year, according to TPI.

CRN | Outsourcing, Offshoring | Outsourcing Contracts Up, But Savings Questioned