The changing shape of outsourcing

The changing shape of outsourcing

Some people have started to believe that not much is happening in outsourcing because it is a mature market. Nothing could be further from the truth. Outsourcing — which accounts for nearly half of the IT services market in Australia — continues to experience healthy growth. In 2003, the Information Services (IS) outsourcing market was valued at $3.9 billion. IDC expects the market to be valued at $5.5 billion by 2008.

A significant proportion of activity in outsourcing has been, and will continue to be, through reinvigorating and realigning existing arrangements to meet evolved business requirements. If IT is to support and enable business objectives being realised, then IT service delivery needs to evolve at the same pace as the rest of the business.

Inflexible outsourcing agreements entered into a number of years ago were structured around different objectives and outcomes than those driving a business today.

Recognising this, a number of organisations are reviewing their outsourcing agreements to ensure they continue to remain relevant.

While objectives focused around efficiency and effectiveness remain integral to many organisations’ outsourcing decisions, the manner in which these arrangements are structured and monitored has changed.

IDC has witnessed a marked shift in the term of outsourcing agreements. Throughout the mid- to late-1990s, most agreements were for more than five years and even reached 10-year terms in some cases. However, contracts signed in 2003 and the early part of 2004 are typically three to five years in length.

Tensions between an organisation and an outsourcing service provider are often the result of a contract that has outlived its usefulness in its current form. Organisations are increasingly recognising the need for continual monitoring of contracts and are refreshing as appropriate. IT service delivery needs to be driven by business requirements, which evolve regularly.

When service levels are being impacted and there is a lack of responsiveness from IT towards renewed business dynamics, an outsourcing contract is often no longer relevant in its current form.

IDC expects the trend towards shorter and more flexible outsourcing contracts to continue as organisations recognise IT needs to respond to changing business dynamics.

In the pursuit of more flexible and responsive outsourcing arrangements, there is a shift away from whole of IT outsourcing in favour of IT functions being outsourced in discrete components or retained in-house as appropriate.

AMP made a strategic decision to retain application related activities internally. ING awarded outsourcing contracts to multiple service providers, as did Energy Australia. While selective outsourcing may deliver improved service levels as service providers focus on core competencies, it does increase the need for strong governance focused on the efficient management of external service providers in achieving a single IT goal.

In an attempt to elevate the strategic importance of IT towards a company’s objectives being realised, IDC believes organisations are taking a more realistic approach to outsourcing and are better equipped to manage these complex arrangements. The results of these efforts are starting to pay off.

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