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To: Glenn D. Rudolph who wrote (330)	2/1/1998 12:09:00 PM
From: Glenn D. Rudolph	Read Replies (1) \| Respond to of 446

By 2000, 75% of enterprises will employ selective IT outsourcing as a routine means to increase competitiveness or gain new resources and skills. Outsourcing -- or hiring outside experts to help manage IT functions -- is becoming the norm among enterprises worldwide. Though often portrayed as an all-or-nothing proposition, in practice, it isn't. Most deals involve outsourcing the responsibility for one or more IT functions, perhaps the data center, certain desktop services or year 2000 programs. Then, as circumstances dictate, a company may target additional IT areas for outsourcing -- or bring others back in-house. Companies have many reasons for outsourcing, and as the trend deepens, they will find more. Among them are: IT outsourcing is a logical extension of the propensity among companies to shed non-core chunks of the business, (e.g., claims processing, payroll or facility maintenance) and hand them over to a skilled vendor. IT is now subject to the same "core competency" litmus test. Enterprises see outsourcing as another tool to help them stay competitive, often by getting access to leading-edge technology, as exemplified by the $2 billion megadeal between J. P. Morgan and Computer Sciences Corp. Others want access to new IT skills, e.g., to install Windows 95, build fire walls and develop Web sites. Even farming out the development and management of applications, sometimes to an offshore programmer, is gaining acceptance. Where once in-house staff routinely built customized software, IS organizations are increasingly buying application suites and hiring outsourcing vendors to install and manage them. Disquiet on the Outsourcing Front In their search for new revenues, vendors are diversifying their services to meet the demands of enterprises. As the market for outsourcing mushrooms, vendors will come under increasing pressures. Gartner Group advises that enterprises carefully evaluate their specific needs and match them to the right vendor. Trends to watch out for: Bad press over customer dissatisfaction with poor service and frustrated expectations More contract renegotiations and customer sophistication Lower profitability for vendors on megadeals The challenge for outsourcing vendors of hiring and retaining enough staff to keep up with the volume of contracts. Based on recent surveys, the gains from outsourcing have consistently fallen short of expectations by CIOs. In many cases, the initial negotiations and contracts are to blame for not defining key issues and anticipated benefits from the deal. "Vendors often oversell the deal; users allow this to happen and end up with unrealistic expectations," says Gartner Vice President Mike Vargo. Customers also don't yet realize that management of an outsourcing relationship takes more time and effort than they had anticipated. "Through 2000, 70% of enterprises will have greater expectations than the ability of external service providers to deliver, in terms of business value and improved processes, resulting in early termination for 10% of deals," says Vargo. The overall impact will be a major winnowing out of outsourcing vendors. "Only five to seven vendors will be able to provide a full suite of IT services on a global basis by 2000; however, many others will be able to succeed with a well-executed niche, whether industry, function, location, technology, philosophy or other strategy," says Vargo. More Megadeals Despite the dispiriting news, Gartner Group predicts that the trend toward outsourcing IT functions will not be reversed any time soon. Additional full-service megadeals of more than $1 billion will be completed in 1997 and 1998. The outsourcing deals by J. P. Morgan and Du Pont are two examples. A number of other large, financially strong corporations are also evaluating strategic megadeals.