The market analysts estimate that there will be a 30% increase this year in the number of enterprises overall that enter into new outsourcing relationships.
The trend toward smaller contracts has important implications for large and small vendors that compete in the growing market for external service providers (ESPs).
"If deals are smaller and there are more of them, this opens up the market, creating new opportunities for more vendors," said Linda Cohen, managing vice president for Gartner. "Smaller vendors, especially, will have new opportunities to compete in specialised niches."
According to Gartner, large ESPs will need to focus on marketing their core service offerings and differentiating their business value – perhaps by more risk-based pricing, such as performance contracts in which the total payment is dependent on business results rather than measurements of how technology performs.
"Many first-time outsourcers will look at outsourcing a set of applications first, and then move to outsourcing more processes," Cohen said. "Some enterprises will be outsourcing for the first time to tap into a vendor's global sourcing option."
Although more enterprises will outsource operations this year, not every enterprise is adequately prepared to manage and execute these programs successfully.
Gartner research has found that C-level executives should collaborate and develop a consensus on specific business objectives before signing outsourcing contracts. Outsourcing programs change the operating model of an enterprise, a step that should involve the commitment of all senior business executives.
"Outsourcing requires an ongoing relationship that has to be managed proactively and measured to achieve what is expected," Cohen said. "This is the responsibility of the C-level executives. They have to collectively define and manage expected business results in any new management model that results from outsourcing. Outsourcing is hard work, and it takes a lot of preparation."
Outsourcing functions such as IT, human resources (HR), customer care, finance, accounting and procurement will continue to be the main segments for growth in 2004, according to Gartner. These functions used to be considered core competencies. However, enterprises are redefining what technologies and processes must be managed in-house vs. accessed via external sources to create economies of scale and enable growth.
"Processes, such as IT, HR and customer care, are increasingly being classified as support services that can be delivered by an ESP," Cohen said. "Once enterprises outsource, few of them take operations back in-house. Satisfactory outsourcing relationships encourage enterprises to analyze the longer-term benefits of outsourcing. This often leads them to pursue these benefits in other operations."