Pace of IT Outsourcing May Be Slowing, Study Finds

The IT outsourcing boom is over, says the management consulting firm DiamondCluster International. Although a majority of firms are committed to increasing their IT outsourcing, the growth rate is dramatically slowing.

Specifically, 64 percent of offshore-service buyers said they will increase their outsourcing in 2006, down from 70 percent in 2005 and 86 percent in 2004. Fifty percent of onshore-service buyers plan to increase their purchases, the firm said, down from 64 percent two years ago.

In 2004, no study participants said they would decrease their outsourcing. But this year, nine percent of onshore buyers and eight percent of offshore buyers said they'll cut back.

The report sees application development and maintenance as the most active areas for outsourcing over the next 12 months, and indications are that the emphasis will be on upgrading existing systems. Offshored tasks will be focused on application development, application maintenance and support, database management and help desk services.

The report says cost savings is the benefit most often cited by companies that outsource. DiamondCluster believes this indicates an increasing difficulty of - or unwillingness to - redeploy employees impacted within an organization.

DiamondCluster's Tom Weakland foresees consolidation ahead among the top tier of IT outsourcing firms. Such firms "can be expected to look toward mergers and acquisitions as a means of building scale, tapping into the global pool of talent, and adding to their current suite of offerings," he said.

The study included 153 buyers and 188 providers of outsourcing services, all of whom were either "directly involved in or highly aware" of their firm's outsourcing-related decisions.