Outsourcing growing, gains among smaller businesses

Spending on outsourcing grew to nearly $100 billion in 1998 and is projected to reach over $151 billion by 2003, according to a report by International Data Corporation. Processing services, which include payroll, claims, and credit card processing, are the most popular outsourcing activity, making up about 60 percent of all outsourcing spending last year, the report said.

The entire computer services industry is experiencing a boom in recent months, according to Merrill Lynch. The investment banking firm reports that in the first half of this year, five deals exceeding $1 billion in worth have been signed by EDS, CSC, and IBM.

Financial services such as banks and insurance companies spent the most on outsourcing their processing services, according to Cynthia Murphy, an analyst with IDC's outsourcing research program. These firms have been a very big consumer of outsourcing in the past simply because most of the processes in the industry are a "good fit," she said.

Although there have been some problems with outsourcing deals, for the most part companies have found that outsourcing is an affordable way to "gain the technology and skills that you currently don't have," Murphy said.

Large companies have grown most comfortable with outsourcing, but in the United States, growth will be driven greatly by small and medium-sized businesses. There has been a "trickle down effect" with outsourcing that began with larger companies who have accepted it, convincing small and medium-sized firms to do so as well, said Murphy.

The majority of worldwide outsourcing spending occurred within the United States, which spent $51.5 billion last year, accounting for nearly 52 percent of all outsource spending. By 2003, that figure is projected to grow more than $81 billion annually, IDC said.

Outsourcing spending grew the fast in information systems, which includes data center, client/server, and help desk applications. Murphy said that this segment of the market is projected to increase at a compounded annual growth rate of 12.2 percent through 2003.