CHICAGO, July 11 /PRNewswire/ -- The IT outsourcing boom is over, onshore providers are facing new pressures, and companies are outsourcing more strategically and selectively, according to the "2006 Global IT Outsourcing Study" published by global management consulting firm DiamondCluster International . To request a copy of the study, send an e-mail to: outsourcing2006@diamondcluster.com.

While a majority of buyers -- 64 percent (offshore) and 50 percent (onshore) -- remain committed to increasing their purchasing, these numbers represent a significant decline from prior years.

"The outsourcing market is maturing in fundamental ways," said Tom Weakland, who leads the outsourcing advisory services practice at DiamondCluster. "Buyers are learning to be more selective and strategic in the way they approach outsourcing decisions, which is tempering the buying process. Many buyers are reaching the mid to final stages of current outsourcing contracts and find themselves distracted from focusing on new initiatives. And many buyers are telling us they have already captured the 'low hanging fruit' and are slow to seek out additional outsourcing opportunities."

Comparing results from previous DiamondCluster outsourcing studies is telling. In 2004 none of the study participants said they would decrease the amount of outsourcing they were doing. This year, nine percent of the buyers of onshore services and eight percent of offshore buyers said they plan to decrease their levels of outsourcing in 2006.

"Companies are reining in outsourcing for three reasons," Weakland explained. "Either they mistakenly outsourced a process or function that is core to their business and are now bringing it back in-house; their provider over-promised and under-delivered; or the complexity of managing and measuring outsourcing projects and relationships overshadowed the benefits.

"This is by no means the death knell for IT outsourcing. However, the boom years for growth have come and gone," said Weakland. "This should serve as a wake-up call for outsourcing providers that all is not well with their customer relationships and that they need to refocus on quality, clarity and measurement."

This year's findings suggest that industry consolidation is likely, Weakland contends: "The large, tier one IT outsourcing firms can be expected to look towards mergers and acquisitions as a means of building scale, tapping into the global pool of talent, and adding to their current suite of offerings. In particular, adding business process outsourcing (BPO) capabilities may be an attractive growth strategy.

"We should also expect to see fewer successful new entrants. Second tier and smaller firms may have to face a hard choice between being acquired or building deep industry or functional skills to differentiate themselves from the outsourcing behemoths. Onshore firms in the U.S., many of whom have already established substantial operations in lower cost countries, may further consolidate their resources outside the U.S. to achieve the obvious cost advantages that offshore operations provide," Weakland added.

"Industry consolidation will create another set of challenges for buyers," said Weakland. "Buyers told us that increased management complexity is the major risk they face in outsourcing and having to manage providers that are going through a merger or acquisition only adds to that complexity."

Following are additional highlights from DiamondCluster's 2006 study: Onshore Providers Must Shape Up or Ship Out

The latest DiamondCluster study reveals some troubling signs for onshore service providers. For example, less than one in three buyers of onshore services reported that all their expectations are being met, compared to 47 percent of the buyers of offshore services.

Forty-seven percent of buyers reported that they had abnormally terminated at least one outsourcing relationship in the prior 12 months. But here again the numbers were worse for onshore providers. While only 28 percent of buyers had terminated at least one offshore relationship, 42 percent of onshore service buyers reported they had done so. Among those, 53 percent cited poor performance by their onshore provider as the reason for abnormally terminating a relationship.

Buyers are also increasingly concerned about the uncertain financial payback of their relationships with their onshore outsourcers. It was their second most frequently cited concern after the risk of increased management complexity. Buyers seem to be signaling growing concern about the effectiveness of their onshore outsourcing relationships. It appears that many onshore relationships have become so complex that it is difficult to gauge their financial success or failure.

"Onshore outsourcers aren't going away, particularly the large companies that have already established substantial offshore capabilities," Weakland said. "But as offshore outsourcers become more successful, traditional onshore employees may see their own jobs outsourced to overseas colleagues at a more rapid pace."

India Holds Tight to Title; Canada Makes Inroads; China Hot on the Horizon

It's no surprise that a solid 75 percent of buyers participating in DiamondCluster's fourth outsourcing survey are outsourcing to India. But Canada is making headway as a haven for outsourcers. U.S.-based buyers apparently believe that the higher cost of outsourcing to Canada is worth the gains in proximity, language and culture.

China has simultaneously emerged as the contender to challenge India in the years to come. The number of buyers that expect to offshore to China has soared 48 percent since 2004. In addition, more than half of the offshore providers currently operating in India expect to grab market share in the burgeoning Chinese economy.

India's outsourcers are also looking to China as a means of alleviating their growing labor shortage. Major IT and BPO services hubs, including Bangalore, Chennai, and Hyderabad, are reaching labor saturation and are desperately looking for educated resources in other locations. Within India providers are building technology centers in less well-known locations like Kolkata, Mysore, and Chandigarh. The situation in India will drive both buyers and providers to expand their list of possible locations for operations. This labor shortage presents an opportunity for other countries to fill the gap.

Global Turmoil Concerns Buyers of Offshore Services

Last year, employee backlash topped the list of risks weighing on the minds of executives. Today, 77 percent of companies cited geopolitical conditions as their primary concern, up nine percent from last year. While tensions abroad may be cause for concern, employee backlash has abated as employers have realized that often it is far more effective to find new, higher-value creating roles for employees that otherwise would have been displaced by outsourcing.

One-stop Outsourcing In?

The percentage of buyers that say they partner with a single provider that can cover all their needs has increased to 28 percent in 2006, its highest level since the study began in 2002. However, 43 percent said they are willing to partner with several providers with similar capabilities as a means of mitigating the risk of over-reliance. Few buyers are making the mistake of hiring an unmanageable multitude of providers, which inevitably adds to management complexity and uncertainty about actual financial payback.

Still Plenty of Room for Improvement

Overall, this year's DiamondCluster IT outsourcing study reveals an industry that continues to mature but there is still plenty of room for improvement on both sides of the outsourcing equation.

"Considering how much buyers stand to gain, it is surprising that they often fail to think strategically about outsourcing," Weakland said. "A tactical approach that focuses on capturing some immediate cost reduction benefits often falls short of expectations, as can be seen by the high rate of abnormal terminations and frustration over unmet expectations.

"The companies that utilize outsourcing to their competitive advantage will have an overarching sourcing strategy -- an efficient blend of employees, onshore and offshore outsourcers, third-party processors and other resources -- and a capability to plan and govern that strategy effectively."

DiamondCluster International is a premier global management consulting firm that helps leading organizations develop and implement growth strategies, improve operations, and capitalize on technology. Mobilizing multidisciplinary teams from our highly skilled strategy, technology, and operations professionals worldwide, DiamondCluster works collaboratively with clients, unleashing the power within their own organizations to achieve sustainable business advantage. To learn more visit http://www.diamondcluster.com/ .

Contacts: David Moon +1.312.255.4560 david.moon@diamondcluster.com Amy Dean +1.773.262.4264 adean@deanpublicrelations.com

CONTACT: David Moon, +1-312-255-4560, david.moon@diamondcluster.com , or
Amy Dean, +1-773-262-4264, adean@deanpublicrelations.com , both for
DiamondCluster

Web site: http://www.diamondcluster.com/