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 requirements.”

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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