Slump won't slow outsourcing

Businesses can put too much trust in their suppliers when negotiating outsourcing contracts, said Ovum Holway's annual report on...

Businesses can put too much trust in their suppliers when negotiating outsourcing contracts, said Ovum Holway's annual report on the state of the UK IT market, published last week.

The analyst firm Ovum Holway's report for 2002 predicted that the outsourcing market in the UK will continue to expand despite the economic downturn, and grow by 15% to almost £8bn this year. This growth rate is only slightly down on the 19% rise in 2001.

In response to the economic downturn IT managers are under increased pressure to squeeze more value from existing IT assets and demonstrate how new projects will deliver a return on investment.

With the promise from suppliers that outsourcing can reduce IT costs, many companies will be tempted to jump on the bandwagon.

However, Anthony Miller, research manager at Ovum Holway and author of the report, warned, "Everyone [the supplier and user] wants to make the contract work and no one wants to be seen as negative so the element of trust can be overdone.

"[Both the user and supplier] need to set out a very clear set of rules in the contract," he added.

Apart from detailed service level agreements to set minimum standards, companies should pay particular attention to ensuring that the contract is flexible enough to change when its business changes, for instance after it merges with another company, Miller added.

Last year, for instance, insurance giant CGNU scrapped a seven-year £124m outsourcing contract with IBM after only two years.

CGNU, which had gone through a merger after the IBM deal was signed, said that the decision to abandon the contract was part of a drive to consolidate its IT systems.

The report states that EDS has emerged as the main winner in the IT services market, growing its revenue by nearly 50% in 2001 to £2.3bn, and dominating the supplier market.

However, users have started to demand greater commitment from their service providers, the report said, with an increase in the use of risk-and-reward contracts, where both parties have a stake in the success of an IT project.

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