Download (direct link):
It is our hope that by discussing the fundamentals of outsourcing, the process can be demystified to some extent and that much of the emotion and hyperbole associated with outsourcing can be abated. Nothing in this text should be construed as a criticism of any outsourcing vendor or its customers. The skill and experience that most outsourcing vendors bring to their tasks will undoubtedly sustain the industry’s growth. In order to address the many business and legal issues that are contained in the typical outsourcing transaction, it is necessary to generalize with respect to the positions taken by both vendors and customers, and their professional advisors. Like all generalizations, those contained in this book may well not apply to any particular transaction.
Finally, notwithstanding the admittedly parochial interests of the authors, anyone entering into an outsourcing transaction—whether a vendor or a customer—should consider consulting with someone who is familiar with the process in order to ensure that the industry developments and lessons learned are appropriately vetted. The laws relating to outsourcing, and the business case analysis underlying any decision to outsource, vary from transaction to transaction and are subject to change at almost the same rate as technology.
1.2 IT OUTSOURCING INDUSTRY
Analysts continue to predict increased growth for the IT outsourcing industry. As noted previously, Gartner Dataquest has forecasted that the $536 billion worldwide IT services industry will grow through 2007 to reach $707 billion, with a compound annual growth rate of 5.7 percent.3 Similarly, IDC expects the
Worldwide IT Services Market Forecast, 2002-2007 (Executive Summary).
1.2 IT Outsourcing Industry 3
worldwide IT outsourcing market to grow 7.7 percent a year over the next five years, to reach nearly $100 billion in sales in 2007.4
The growth is being fueled by several factors, including an increase in nascent markets spawned by the traditional IT outsourcing model, such as business process outsourcing, offshoring, and Internet-enabled outsourcing. Not only is the IT outsourcing market seeing an increase in the number of outsourcing contracts, but at least one analyst has found that the size and scope of the average outsourcing contract has also increased. IDC estimates that in 2003 the 100 largest worldwide outsourcing contracts ranged from $80 million to $5 billion, with 43 percent of IT outsourcing contracts valued between $100 and $249 million. According to IDC, this represents an increase from 2001, when contracts valued at less than $100 million represented the largest price offering.5 The growing drive toward globalization is likely a major factor in the increased value of IT outsourcing contracts, because more companies are looking for a single service solution for their global operations.
IT outsourcing is an evolving market. Customers are continually looking for creative ways to structure deals through such mechanisms as strategic alliances, comarketing agreements, and joint ventures, in order to reap the most benefit from the proposed ongoing alliance. Outsourcing vendors continue to strive to refine established methodologies and processes, while adapting services and infrastructure to leverage new technologies, responding to demands for innovative service models (such as utility-based services), racing to deploy Internet-based products and services, and building the expertise and systems to service user demands.
In one respect, IT outsourcing is a mature market, having over the past decade experienced deals that have run their full term and others that have been renegotiated and terminated, thereby benefiting from lessons learned and risks taken. In another respect, with the emergence of a new generation of outsourcing providers supporting new business processes and moving to offshore models and the continuous drive to improve existing methodologies and process, IT outsourcing remains in many ways an uncharted frontier.
Some of the major trends in the IT outsourcing industry are highlighted as follows, with many of them discussed in more detail later in this book:
• Business process outsourcing. The buzzword in the outsourcing industry continues to be business process outsourcing (BPO). Companies are looking at almost every noncore function to determine the feasibility of outsourcing the function to a third party. Leading business processes that have been targeted for outsourcing include human resources, procurement, finance and accounting, call centers, claims processing, facilities management, and logistics. Once trumpeted by the big accounting firms looking to grasp a larger piece of the outsourcing services market, all of the major top-tier vendors now offer a wide range of BPO services as well as several specialty outsourcers, which focus on a particular process. The BPO
4. CNET News.com, October 1, 2003, Report: "Big Blue Still Biggest in IT Outsourcing."
5. The WHIR's Web Host News, June 9, 2003, "IDC: Outsourcing Future Is Bright."