Predictions for 2008 outsourcing market

Outsourcing relationships and destinations are changing, and vendor management is as important as ever, according to new analyst reports.

Russian outsourcing provider Luxoft, said outsourcing vendor and client relationships are evolving into partnerships with clients now seeking increased value from vendors. Vendors are expected to deliver innovation and expertise to client’s business processes, Luxoft said in a report predicting outsourcing trends for 2008.

The National Outsourcing Association (NOA), in its annual survey of upcoming outsourcing trends, said Knowledge Process Outsourcing (KPO), which it defines as the “outsourcing of high value-add functions,” is likely to increase as trust in business process outsourcing grows.

The new trust involved in the outsourcing partnerships will mean more data is shared and security measures become even more essential to deploy, Luxoft said.

Luxoft also predicts the growth in popularity of outsourcing for functional and system integration, and for new outsourcing services to be put on offer in the market that test all areas of system performance.

Also, because of increasing competition for skills in some outsourcing destinations, there will be more evidence of vendors tapping into the resources of other countries. “This could, for example, bring Russia and India or China together in new and interesting ways,” Luxoft said.

Nearshore destinations will continue in their attraction as clients want “the combined benefits of proximity and familiarity as well as the manpower boost of outsourced resources,” added the Russian firm. In particular Eastern Europe and Canada are noted destinations. The Russian outsourcing industry escalated to over $1bn from 2006 to 2007, Luxoft said.

The NOA said the global delivery model is likely to move beyond India, citing the often said explanations of climbing attrition rates and rising Indian salaries.

But news last Friday of Infosys Technologies registering growth of 25 per cent during the third quarter of this fiscal, indicates Indian providers are challenging analyst’s expectations.

The NOA also predicts more demand for management skills. In the association’s report, it said “NOA research shows both end-users and suppliers need staff who understand and have experience of outsourcing and the outsourcing life cycle”.

Gartner also explained the importance of vendor management in its latest analysis of the outsourcing market. Kurt Potter, Garner research director, said “although user organisations often have fundamentally sound procurement organisations to initiate outsourcing contracts, for many, their IT sourcing strategies and governance structures are still immature, lacking altogether, or misaligned with enterprise objectives.”

Gartner has forecast the global outsourcing market to grow at a rate of 8.1 per cent in 2008, but said publicly reported IT outsourcing and business process outsourcing contract values decreased overall by 50 per cent in 2007 because the outsourcing market has matured and there is less publicity on deals, while multi-provider strategies deals are smaller in size.

The NOA also predicts that although new technology such as virtualisation, grid computing and thin client services, will be used by organisations to cut costs, the transition is likely to be difficult and possibly costly. This might mean that firms decide to go with outsourcing providers who can use this technology easily and cheaply, because they have the right tools and skills at hand.