More than $AU7 billion worth of outsourcing contracts are up for grabs in Australia this year with many customers opting for the selective sourcing model.

According to research firm IDC, which has released the results of its 2006 Australian outsourcing end-user survey, a number of large contracts are expected to go with selective sourcing as organizations continue to unbundle mammoth IT contracts and look to best-of-breed providers.

IDC research manager for outsourcing and BPO, Aprajita Sharma, said tier one providers such as IBM, CSC, EDS and HP will grapple with a dynamic and competitive environment.

"They face tough competition from the tier two providers and Indian offshore outsourcers," she said.

In recent years selective sourcing has been the single, biggest trend shaping the IT services market.

Under this new regime, customers can focus on buying the best, not the biggest.

Government agencies have led the way rewriting the services landscape by breaking up mega contracts and sourcing them to multiple providers.

Sharma said tier one providers face the dilemma of how to balance profitability and productivity imperatives with optimising performance to the customer for long-term growth and market advantage.

"With this in mind, it is increasingly important to maintain the customer base and focus on longer term account profitability," she added.

Frost and Sullivan analyst James Turner said the big boys can no longer compete on price alone.

Turner said to effectively compete the big providers include offshoring in their offerings.

"Some of the bigger players will not tender for work without pushing offshoring possibilities to keep costs down," he said.

Key findings from the IDC research include:

* Though Australia is the most mature geography in Asia/Pacific in terms of procuring outsourcing services, there is still a huge untapped potential in the country, especially in the SME segment, which constitute 98.8 per cent of the total market;

* The average contract size of most of the outsourcing contracts continues to range from three to five years with companies looking at a contract renegotiation after the tenure.

* Network management has significant penetration rates but remains a priority for many organisations across all segments in 2007.

* The largest demand for desktop management on the other hand, is most likely to arise from the banking/insurance/financial services vertical.