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Outsourcing Contracts Up, But Savings Questioned

The total value of all large contracts signed in the first quarter of 2006 increased 173% year-over-year to $22.7 billion, but companies aren't saving as much as expected.

More companies are outsourcing than ever before, but they may be saving a lot less from the process than anticipated, according to a newly released market survey.

In its quarterly review of the IT and business process outsourcing market, advisory firm Technology Partners International found that the total value of all contracts worth more than $50 million signed in the first quarter of 2006 increased 173% year-over-year to $22.7 billion. And a record number of 83 new deals were signed in the quarter, TPI said.

The research firm also found that the value of contracts in the pipeline--deals that are out for bid, but have yet to be signed--increased 39% year-over-year to $22.6 billion. TPI released its findings on Wednesday.

But while more companies are turning critical IT and business functions like help desk support and customer service over to third parties, who in turn often send the work to subsidiaries in low-cost countries like India or China, they're saving less from the process than is widely believed. In India, programmers and service workers are paid anywhere from 80% to 40% less than their U.S. counterparts. However, the overhead associated with outsourcing appears to be eating up the bulk of those savings. Factoring in transition, legal, advisory, and management costs, outsourcing typically lets a company reduce the expense of a particular function by 15%, TPI says.

TPI also found that fewer vendors are getting a bigger share of the outsourcing market, raising the possibility that the highly fragmented services industry is beginning to consolidate. In the first quarter of 2006, the six largest vendors--Accenture, ACS, CSC, EDS, Hewlett-Packard, and IBM--received 52% of worldwide outsourcing revenue, up from 47% in the previous year, according to TPI.

Paul McDougall is a former editor for InformationWeek. View Full Bio

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