While outsourcing in the local information systems market grew 20 per cent in 2001 and will keep growing, some players will hit the wall in an industry shakeout over the next three years, according to analysts.
Outsourcing's strategic benefit to business is driving the growth as it shifts away from the traditional reasons for its adoption - improving IT efficiencies, reducing operating costs, improving IS flexibility, focusing on core competencies and increasing operational efficiency, according to industry analyst IDC.
Factors such as privatisation, deregulation and global market forces in companies with limited resources and a lack of skilled staff will make outsourcing an attractive alternative for running operations, said Kathy Benson, IDC senior analyst IS outsourcing.
The IDC report said the decision to outsource has become more strategic. As companies aim to gain a competitive edge, IDC said, they turn to outsourcing for reasons such as keeping up with cutting-edge technology, building partnerships and broadening infrastructure and operational reach.
"Recent solid growth is the result of continued strong demand for multiservice IS outsourcing contracts that can include data centre operations, desktop management, LAN and WAN management, application development and maintenance, help desk support, disaster recovery services, and Internet and e-business services," Benson said.
"As the new economy spreads to a global scale, companies from diverse backgrounds will need greater assistance in managing IT and business functions to remain competitive. The dynamic nature of our world that is largely based on information technology will guarantee a continued strong demand for outsourcing," Benson said.
Gartner also forecast strong growth in the IT outsourcing market in its annual report on IT trends in Australia and New Zealand.
However, Gartner predicts consolidation in Australia's IT services sector, and warns that some players will hit the wall in the next three years.
In its report Gartner agrees outsourcing will give end users an edge that is critical in a globalised economy.
"Further, with budget constraints on capital investment, outsourcing looks more attractive than ever for businesses to continue to grow their bottom line," the report said.
Although the IT services market will continue to grow, Gartner forecasts a shakeout as some areas, such as ASPs, will be affected by the economic slow down.
Vendors must offer flexible contracts and deliver short-term ROI, Gartner said.
"IT services companies must differentiate themselves against their competitors which becomes tougher when everybody claims to be doing everything," the Gartner report said.
Australia's IS outsourcing market grew to about $3.8 billion in 2001, the research group said. IDC forecasts the market to reach $4.3 billion by 2002, in its report titled Australian IS Outsourcing Forecast and Analysis 2001-2006.
The finance sector leads the vertical markets accounting for 49 per cent of IS outsourcing contracts let this past year. The telecommunication and media sector follows at 23 per cent of the market. Benson said she sees no dramatic change in the vertical market over the coming years, with the finance sector continuing to dominate.
IDC listed the three biggest IS contracts signed in 2001 as:
* EDS signed a 10-year contract with Westpac valued at $1 billion.
* EDS also won a $500 million outsourcing contract with Telstra for the next five years.
* Deloittes signed a five-year outsourcing contract with Telstra for $300 million.
The IDC report ranked the top 10 outsourcing providers by 2001 revenue as: IBM GSA, EDS, CSC, Compaq, Fujitsu, KAZ, Hewlett-Packard, Unisys, Telstra Enterprise Services and Ipex.
While the big three players IBM GSA, EDS and CSC continue to dominate, accounting for about 76 per cent of the total IS outsourcing market, Benson said opportunities are beginning to open up for others, including local firms such as KAZ and Ipex.
Benson said, "A growing number of outsourcing contracts -- specifically those with the highest values and broadest range of services -- will encompass business process outsourcing and Internet-related services."