Strong growth for outsourcing market

THE worldwide outsourcing market will continue to grow at a healthy 8.1 per cent in 2008, while the Australian market will expand at a more modest 4.7 per cent to A$10.9 billion for the calendar year.

But despite the strong market acceptance of outsourcing practices, Gartner warned customers that hiring outside ICT expertise was not without complications.

“Although organisations often have fundamentally sound procurement departments to initiate outsourcing contracts, for many, their IT sourcing strategies and governance structures are still immature, lacking altogether, or misaligned with enterprise objectives,” said Gartner research director Kurt Potter.

“Because they lack the basic building blocks for successful vendor management, expected cost savings and other benefits are difficult to obtain,” Mr Potter said. “In extreme cases, the lack of needed trust and control to optimise the outsourcing relationship results in deal failure.”

Although outsourcing continues to grow, publicly reported IT outsourcing (ITO) and business process outsourcing (BPO) contract values decreased overall by 50 per cent worldwide in 2007, Gartner said.

Companies are outsourcing more, but electing to use a multi-provider strategy and more deals are simply smaller in size, with many of these deals not large or ground shaking enough to report.

“In 2008, we expect to see some early adopters of multisourcing to consolidate around fewer providers to reduce their service integration costs and harvest the benefits of better relationship management with fewer strategic suppliers,” Mr Potter said.

In 2007, Australia enjoyed a buoyant economy resulting in outsourcing business growth for the many multinational and local as well as offshore service providers who have a growing in presence in Australia, according to Gartner research vice-president Jim Longwood.

“Australia is a mature market in terms of outsourcing, where enterprises are now signing second- and third-generation deals. In 2007, they moved toward more-selective outsourcing and multisourcing deals, where incumbent service providers usually retain core infrastructure services and specialist providers take over peripheral services. The business process outsourcing (BPO) market for back-office functions also started to take off, mainly in the transportation, telecommunications and financial services sectors,” said Mr Longwood.

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Chip market growth slows dramatically

LOWER memory prices and continued price competition in the microprocessor market has led research group Gartner to dramatically lower worldwide growth forecasts to 2.5 per cent for 2007.

Gartner says the global semiconductor market will be worth US$269.2 billion (A$324.6 billion) in 2007, an increase of 2.5 per cent over 2006. The company had previously forecast growth for the year of 6.4 per cent.

Sales of semiconductors in the first quarter were more than five per cent lower than in fourth quarter 2006, a worse than expected decline that would normally be associated with the seasonal build-up in inventories at the end of the year.

“Since the beginning of this year, soft semiconductor market conditions have been exacerbated by sharply declining ASPs in key device markets such as DRAM, MPU and application-specific standard products (ASSPs),” said Gartner research vice-president Richard Gordon.

“It is likely that, despite continued unit growth in influential electronic systems markets, downward device ASP pressure will remain in place for much of 2007 as oversupplied semiconductor market conditions persist.”

The memory market is forecast to decline 4.7 percent in 2007 primarily due to a continued weakening of DRAM ASPs. Gartner’s latest forecast has DRAM revenue declining by 11.1 percent in 2007 to $30.5 billion, despite strengthening bit growth for the year.

The DRAM outlook for 2008 is for a mild revenue decline, again attributed to excess capacity and continued price declines. However, the 2008 outlook could improve if DRAM vendors adjust their current capacity plans, or if the NAND flash memory industry begins to see notably strong growth.

Gartner expects the worldwide semiconductor industry to return to modest annual growth of 8.7 percent and 7.2 percent in 2008 and 2009, respectively.

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Outsourcing in flavour with ‘megascope’ deals: Gartner

THE number of massive IT outsourcing contracts in the US worth $1 billion were long been used as the yardstick to measure the health or otherwise of the tech services sector.

In the Australian corporate and government sector the budgets are somewhat more modest … but confidence in the IT services sector was still measured by the hundred-million-plus deals.

Research group Gartner says 2007 will be marked not so much by the outsourcing “megadeal” of $1 billion or more, but rather where multiple suppliers win smaller contracts in massive projects of “megascope”.

Gartner defines a megascope as an enterprise-wide scope of work that is or will be outsourced and the organization awards the work to several providers on a selective basis, matching scope and requirements to the best value or best-fit provider.

Cumulatively, the megascope award may top $1 billion in value, but each individual contract is typically smaller.

According to Gartner, organisations generally won’t award large IT outsourcing contracts to one provider in 2007, but will split the work up among several companies.

“We expect large organisations to source the largest parts of their megascope engagements to large providers that have a similar global presence,” said Gartner research vice-president Lorrie Scardino.

“However, these large organisations will consider and select smaller or regional providers for focused parts of their megascope deals to engage with focused specialists, or expand the scope of services that are globally delivered.”

In 2006, many organisations made several awards by breaking up the scope of work into selective segments.

Although not all of these selective awards were megascope candidates, the total contract value awarded by a single client to multiple providers is a significant indication of the specific organisation’s adoption or continuation of outsourcing as a pillar of business strategy, as well as the market’s continued growth.

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