Special Report: Outsourcers Lose LusterSpecial Report: Outsourcers Lose Luster

Our survey addresses one piece of conventional wisdom that's commonly misperceived: Outsourcing isn't always done at the expense of IT jobs. Nearly a third of the organizations surveyed increased IT jobs in the past year, even though they outsourced some work. Many businesses farm out technology work because their own staffs are working at full capacity. Ceridian Canada hasn't reduced its IT head count since striking its deal with IBM. Rather, the company turned to the service provider as a means to launch quickly a new project with skills it lacked in-house. "We wanted to get to market quickly because we knew a competitor was coming out with something similar," Clement says.

By far the largest number of survey respondents, 47%, pointed to operational expertise as one of the most important reasons to partner with an outsourcer. More people cited expertise over cost savings (35%), which could reflect a general upswing in the economy. In 2002, cost savings was the reason respondents most frequently cited for outsourcing. The shift means businesses may be thinking more strategically about IT. The main reason health insurer Blue Cross Blue Shield of Massachusetts signed on for a multiyear, $320 million extension to its contract with EDS was "to help move our business forward," CIO Carl Ascenzo says. To be sure, Ascenzo wants EDS to help him keep his IT costs in check, but he wants access to applications such as EDS's MetaVance, which lets Blue Cross Blue Shield members tailor their own interactions with the insurer.

That a good outsourcing partner can deliver revenue-generating business enhancements, and not just cost savings, may partly explain why outsourcing spending is rising. In 2002, 51% of businesses information surveyed spent $1 million or more on outsourcing, and only 20% allotted more than $10 million. Now, nearly 60% earmark $1 million or more, and 25% spend more than $10 million.

Increased spending on outsourcing means an increased focus on the minutia of the deal. Nearly half of our respondents get outside help when constructing outsourcing deals. Such deals are more complex as businesses turn over a greater portion of their operations to third parties. "The issues can range from whether there is a legal transfer of intellectual property to who is responsible for the pensions of employees that get moved to the outsourcer," says lawyer William Bierce of law firm Bierce & Kenerson. At Ceridian Canada, in-house counsel helps to construct tighter contracts with IBM to avoid future problems. "We are moving from service-level objectives to service-level agreements," Clement says.

Outsourcers face tough challenges to satisfy their clients as companies rely more on their services. And, as our survey suggests, there's plenty of room for improvement.