By Stacy A. Anderson, Wall Street Journal
July 11, 2006
Companies may be tapping the brakes in the race to outsource information-technology.
A survey by DiamondCluster International Inc., a Chicago-based management-consulting firm, found that 64% of the buyers of offshore outsourcing services and 50% of buyers of onshore services planned to increase their use of such services in the next 12 months, a much lower figure than in previous years. Last year, 74% of the survey respondents said they planned to increase their outsourcing overall.
Buyers of outsourcing services also showed a greater willingness to terminate outsourcing contracts. About 8% of the buyers of offshore services and 9% of the onshore buyers said in the latest survey they planned to decrease their use of outsourcing in 2006. In last year’s survey, 5% of offshore-service users and 7% of onshore-service users said they were poised to terminate contracts. In 2004, none of the survey respondents had such plans. DiamondCluster has been conducting the survey since 2002.
This waning enthusiasm partly reflects mistakes companies have made or unrealistic expectations they have had in earlier outsourcing efforts, says Tom Weakland, managing partner of global sourcing practice at DiamondCluster. Others feel they have outsourced as much as they could.
Some companies feel expected savings from outsourcing never materialized. “They’re not getting the 40%, 50%, 60% cost reductions they thought they would get,” Mr. Weakland says.
Slower growth in outsourcing raises the likelihood of industry consolidation. Mr. Weakland predicts a growing number of mergers and acquisitions among the top outsourcing firms. There also will be fewer successful new entrants, he predicts. Onshore outsourcing firms in the U.S. may further consolidate their resources overseas to take advantage of lower costs, he says.
India continued to be the leading home of outsourcers, with business from 75% of the survey respondents. But the number of companies saying they expect to outsource to China is growing.
Also, U.S.-based companies are increasingly looking into Canada for outsourcing needs. While the cost isn’t low, buyers are comfortable with “near-shoring” because of the proximity and common language, Mr. Weakland says.
DiamondCluster interviewed 153 buyers of outsourcing services in the U.S. and United Kingdom and 188 providers in about 10 countries. The survey focused on information technology, because it is one of the most popular services that is outsourced. It includes such things as help desks and computer and database maintenance.
