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Financial Service Providers Should Outsource More

IT outsourcing should be used strategically, analysts said, even though data shows its use is dropping.

Gartner forecast that financial service providers (FSPs) will spend $65.7 million on IT services in 2005, but the market research firm expects to see a drop in overall outsource spending in 2006.

Nevertheless, Gartner called for an increase in outsourcing to improve bottom lines.

According to Kimberly Harris-Ferrante, research vice president at Gartner, most FSPs use outsourcing tactically to augment staff for faster project turnaround or to reduce operational costs.

"FSPs should now begin outsourcing strategic projects in order to gain larger-scale, enterprise-wide value," she said in a statement. But Gartner expects less than 30 percent of FSPs to outsource strategic projects by the end of 2006.

Gartner advised that outsourcing should be strategic, with policies for how and when to use it to achieve goals. Proper governance of outsourcing projects is a must, analysts said, and each project should have a designated leader who has the power to control the project.

Another analyst report today showed a drop in the use of outsourced development.

According to Evans Data's Summer 2005 Enterprise Development Survey, 19 percent of companies are outsourcing development in an effort to utilize special expertise, a huge decrease from 44 percent five years ago.

In a poll, 28 percent of companies said simple cost savings have usurped special expertise as the main reason to outsource, up from 15 percent five years ago.

"Outsourcing once made use of high-level experts to bring particular expertise to a development project, but now we're seeing that outsourcing is much more likely to be used to save development costs," John Andrews, Evans Data's COO, wrote in the report.

Gartner said companies should identify the best types of projects and processes to outsource; learn to balance onshore, near shore and offshore alternatives; and select sourcing partners based on the project's scope, the pricing model, their risk tolerance and the desired business outcome.

If outsourcing is used incorrectly or not properly managed, Gartner warned, it can lead to wasted time, money, project failures and even business failures.