Inextricably Linked

One of the biggest challenges facing most organizations today is aligning their IT investments and projects with their business goals–in other words, making sure that IT is delivering specific business benefits, such as improving customer loyalty, shortening the time it takes to get new products to market, or gaining market share, in a cost-effective way. For many, this involves reducing costs while getting more performance out of investments made during the dotcom boom.

At the same time, as economic recovery gains a stronger foothold, organizations are beginning to look to the future when they must invigorate their growth strategies in order to remain competitive. This requires a shift from treading water to swimming forward. Organizations must set new strategies and determine in which direction they want to move and then get their customers, employees, suppliers and partners in line with this direction. This often requires significant change in processes and culture.

“40% of Fortune 1000 companies looking at outsourcing have a significant offshore component” TRACI GERE

IDC’s research shows that, increasingly, companies are making the strategic decision to use outsourcing as a tool for implementing new strategies, focusing on defining their core competencies and then determining whether a service provider is best suited to take on responsibility for other processes that fall outside of that competency focus. Recent IDC surveys reveal that 40% of US organizations already outsource some activities or processes in corporate functions and IT, with an additional 11% considering outsourcing decisions within the next two years.

Moreover, we see industry leaders and brand names like Procter & Gamble, American Express and AT&T engaging in outsourcing of corporate functions and industry processes, including human resources, customer care and IT. These firms view outsourcing not only as a way to reduce the cost of delivering a particular service, but also as a way to structure their organizations, improve a process and to tackle the next layer of process integration. Those pushing the outsourcing envelope see it as a platform for launching new relationships with customers and entering new markets, in some cases redefining supply chains and industry boundaries.

These trends are fueling the IT and BPO opportunity. IDC’s forecasts, based on a detailed analysis of enterprise spending on core business functions, show worldwide spending on BPO of $774 billion in 2002, and we predict that this will grow to over $1 trillion by 2006. The well-established IT outsourcing market will grow from $116 billion in 2002 to $160 billion by 2006.

With such big numbers, it is helpful to think of the source of spending growth as the increasing tendency of organizations to take something that they have spent on internally and shift that spending to an external service provider, usually with an expectation of cost savings between 20% and 50%, according to IDC’s most recent data.

How does the offshore phenomenon fit into this picture? To deliver these cost savings, organizations must look to all sources of competitiveness, and access to high-quality, cost-advantaged labor sources is an obvious place to start. According to TPI, a sourcing advisory firm that is a strategic alliance partner of IDC, 40% of the negotiations it is involved in on behalf of its Fortune 1000 clients include a significant offshore component. Organizations are testing the waters and gaining experience in working with offshore partners, and are learning about the associated benefits and challenges. While there will be ups and downs on the journey ahead, the role that offshore can potentially play in enabling organizations to move forward on their plans is simply too compelling to ignore.

IDC believes that the offshore phenomenon will continue to have a deep impact on the services industry, helping to redefine the value delivered by services as it challenges current cost structures. However, the key for both buyers and suppliers of offshore services will be to make sure that they do more than just achieve cost savings. Offshore services providers must also show that they can help deliver on the promise of invigorated growth and business performance.

TRACI GERE

The author is vice-president IDC US Services Research Group