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Gartner: Outsourcing to grow, but deals to shrink

Megadollar outsourcing contracts are on the wane, says the research firm, but the number of new deals will grow by 30 percent.

Huge outsourcing deals are on the outs, according to new research from Gartner.

On Thursday, the research firm predicted a shift away from full-service, 10-year, multibillion-dollar outsourcing deals for technology service providers. In the future, the trend will be toward smaller outsourcing agreements with specific business goals, Gartner said.

Outsourcing refers to the farming-out of work such as information technology tasks or business functions like customer service.

Gartner also predicted that the number of businesses starting new outsourcing deals will grow by 30 percent this year.

As a result, suppliers of outsourcing services--which include IBM, Electronic Data Systems and Accenture--may have to adjust, Gartner suggested.

"If deals are smaller and there are more of them, this opens up the market, creating new opportunities for more vendors," Linda Cohen, Gartner managing vice president, said in a statement. "Smaller vendors, especially, will have new opportunities to compete in specialized niches."

Large outsourcing providers will need to focus on "marketing their core service offerings and differentiating their business value," according to Gartner. The research firm said large outsourcers should propose 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.

The notion that outsourcing megadeals are waning runs counter to a recent report from market analysis firm Datamonitor. Datamonitor said its IT Services Contract Tracker--which follows new outsourcing, systems integration and consulting deals worth more than $1 million--found that the number of deals with a value greater than $100 million increased by 49 percent to 244 last year, and deals worth more than $1 billion more than doubled to 29.

Advocates of outsourcing argue that it allows companies to focus more on their core business rather than having to take care of such things as software, human resources or accounting. Another lure of farming out tasks is that it can trim a company's costs.

Outsourcing can involve sending work to lower-wage locales such as India or the Philippines. That practice has become a hot-button topic for U.S. technology workers, who have faced major layoffs in recent years.

Gartner warned that not all companies are ready to manage outsourcing programs effectively. "Outsourcing requires an ongoing relationship that has to be managed proactively and measured to achieve what is expected," Cohen said. "Outsourcing is hard work, and it takes a lot of preparation."