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Despite suffering a recent backlash from several high profile contract failures, outsourcing is firmly back in fashion with global businesses dramatically increasing IT and business process outsourcing (BPO) during 2003.

According to research published today by Datamonitor, the total value of major global IT services outsourcing contracts during 2003 was $119bn, representing a 44 per cent increase over 2002.

The number of outsourcing deals with a value greater than $100m was estimated to have increased almost 50 per cent to 244 during last year, while those worth in excess of $1bn more than doubled to 29.

A clear trend identified by the report is a "massive increase" in the use of the offshore outsourcers, where clients cash in on cheap application development and management skills from low-cost countries such as India and China.

The study tracked $1.66bn of contracts with an offshore delivery element in 2003, which represented a huge 890 per cent increase over 2002. The analyst firm observed that companies such as HSBC and BT Group have come under fire recently for their plans to replace some IT and back office processing positions in the UK with offshore labour. However, Datamonitor found that only a very small amount of deals in 2003 involved offshore delivery - just 1.4 per cent.

The independent market analyst firm's IT Services Contract Tracker found that, this increase has largely been driven by big new contract awards by public sector organisations including the UK National Health Service and the US Department of Defense, which have brought in private sector firms to upgrade their existing technology infrastructures.

Nick Mayes, managing analyst for Global Computing Services at Datamonitor, said: "There was a big surge in the number of mega-deals last year. But the majority of them will not be as profitable for the services providers as those long-term contracts that they signed in the 1990s, as it has become a buyer's market.

"Clients have been able to squeeze some big cost reductions out of their incumbent suppliers, which are also being held to increasingly tight performance targets."

IBM Global Services was estimated to have taken the largest share of major contracts in 2003 with 21 per cent, while Computer Sciences Corporation and HP made significant gains.

Datamonitor said that these increases marked a reversal of fortunes for outsourcing firms, many of which had attracted a significant negative publicity in 2003, as clients including the UK Inland Revenue and the US Internal Revenue Service ran into problems with their incumbent suppliers.

The study cited the UK Inland Revenue as a prime example: After ending a heavily criticized deal with EDS, the Government department signed a new $5.1bn deal with Cap Gemini Ernst & Young in December 2003, in what ranked as the year's largest single contract.

The biggest spending sector was found to be the central government sector where the analyst firm tracked $18.5bn of contracts, which was more than double the level in the previous year. The defence sector was identified as the second biggest investor, with $18.2bn in deals during 2003. ®

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