Outsourcing activity on the increase but suppliers fear unrealistic expectations

The National Outsourcing Association (NAO) said that any growth was likely due to recent "economic turbulence".

Outsourcing in IT led the growth, showing a 12% increase in revenues for the last three months of 2008, compared to the same period in 2007. More general business process outsourcing activity only grew by 6%, according to the research which involved interviewing 50 people from outsourcing companies.

The NAO report showed that the organisations it talked to expected growth to weaken only slightly in the first three months of 2009. Growth was expected to fall to 7.7% overall, with an expected weakening of IT outsourcing performance relative to business process outsourcing revenues.

The economic crisis of the past year has had an effect on the outsourcing market, the report said, and deals are simpler and  more cost-focused than before, it said.

"While there remains evidence of frozen decision-making within organisations, and this appears to remain most evident within the banking sector, there appears to be a healthy outsourcing market both in terms of new opportunities and, in particular, in terms of scope expansion within existing clients," said the report.

"However, the nature of deals has changed with organisations typically looking for certainty of cost reduction within the first year of the contract. Organisations are clearly less willing to take on long-term transformational deals that require significant up-front investment," it said.

“Outsourcing has traditionally been seen as a cost saving mechanism for business, so in times of economic turbulence it is not surprising that the industry is continuing to grow," said NOA chairman Martyn Hart.

Hart said, though, that cost pressure was leading to companies trying to squeeze too much from outsourcing suppliers. He said that this threatened the very efficiencies firms sought.

"With the increased pressure on companies to cut costs many are pushing through higher volume low cost contracts, over shorter time frames, which more often than not sets the outsourcing contract up to fail," he said. "It is more important than ever that contracts work for both parties and by following best practice from the outset both the supplier and the outsourcer will be able to form a mutually beneficial partnership which is paramount to outsourcing success."

While the value of 70% of outsourcing contracts has stayed stable, it has risen in 20% of cases and fallen in 10% of them.

Outsourcing companies are slightly more confident than they were last year, they told researchers. While the confidence of 40% is unchanged, the confidence of 30% is slightly higher and 10% are much more confident about their prospects, the research showed.