Gartner: Half of Outsourcing Deals Disappoint

Outsourcing deals may be all the rage with corporations trying to slash
operating costs, but only half actually manage to meet expectations,
according to a new study.

Tech research firm Gartner said a survey of executives
about their outsourcing deals shows that 50 percent of external service
provider (ESP) projects will be considered unsuccessful by senior
executives. The biggest reason: they didn’t, or have yet to, deliver the
anticipated value.

The report, “Outsourcing Strategies and Challenges” was presented during
Gartner’s annual Symposium/Itxpo event, which is taking place this week in
San Diego.

“Over the past decade, while outsourcing has become part of the
mainstream business operating model, there are far fewer good outsourcing
deals than deals that are considered less than effective,” the report said.

“IT enterprises must skill up to the competencies of developing robust
sourcing strategies that map to business requirements and develop the
competencies to deliver a mix of internally and externally vended services
seamlessly. This requires not only new skills, but new behaviors, new
processes and new measurement schemes.”

But most important, the study continued, is that the relationships
between buyers and suppliers of outsourcing services will have to change.

Linda Cohen, Gartner’s managing vice president, said as IT and business
strategies have become steadily more intertwined over the past decade,
different phases and approaches to outsourcing have begun to spread. They
range from cost-focused, to adding value, and more recently, with the advent
of the Internet, to improving speed to market and scalability.

“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 Cohen, who presented the study.

The study results arrive as businesses are increasingly adopting
Internet-based models, which means that speed and skills are increasingly
trumping cost efficiencies. At the same time, ownership of technology is
giving way to “utility” service provider models, Gartner said.

Cohen said the impact on businesses is that they are left to
square two very different strategies — IT infrastructure that is
largely internally built and managed by enterprises or IT infrastructure
that is built and managed by external service providers for on-demand usage
by enterprises.

Meanwhile, as enterprises become more dependent on external service
providers, they also have to decide whether to build their strategy around a
single, external outsource, or multiple, integrated outsourcers.

A single-source approach works for enterprises that can manage a single,
complex contract, but lack the capability to manage and integrate multiple
suppliers, Cohen said.

However, Gartner analysts said that through 2004, multisourcing will
remain the dominant sourcing strategy, and 40 percent of large enterprises
will adopt a prime or general contractor to manage the ESP chaos.

“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

The report concluded that executives need to adopt skills that
help them distinguish between the different flavors of outsourcing available today.

Still, the results said that through 2003, fewer than 30 percent of
enterprises will have formal plans for managing long-term relationships with
their service providers.

And for all the disappointments and dashed expectations that enterprise
executives experience with outsourcing results, outsourcing will continue growing at a compound annual growth rate of 6 percent a year, the report said.

According to Gartner’s data, the IT
services market, estimated at $520 billion market in 2000, will reach $696
billion by 2005.

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