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DiamondCluster's annual survey of outsourcing providers and their customers reveals the market is still growing - but customer disatisfaction is growing too.

Just over half of buyers have prematurely ended an outsourcing agreement within the last twelve months, compared to j21 per cent a year ago. Contracts were terminated because of poor provider performance (36 per cent), moving the function back in-house, cited by 11 per cent of respondents, and failure to achieve cost savings (seven per cent).

DiamondCluster blames several factors for this including the explosion in providers between 2002 and 2004, which meant that some were below par. It also found many buyers who fail to understand the complexity of managing an outsourced contract.

Even more damning were figures from providers - in 2004 only seven per cent admitted a customer had prematurely ended a contract. But the 2005 survey found 49 per cent of outsourcing providers have had a contract terminated early.

But despite the discontent, outsourcing is still growing. Some 74 per cent of survey respondents expect to increase spending on outsourcing in the next year, up from 64 per cent last year.

India and the US remain favoured destinations, for contracts which are offshored as welll as outsourced - three-quarters of all respondents send some IT functions to one or both countries.

The biggest change is in attitudes to China. In 2004 none of the respondents was looking to outsource to China, but this year six per cent of buyers have operations there. In 2004 only eight per cent of buyers expected to have operations in China within five years, but now 40 per cent expect to do so. Israel and Russia are getting less popular as potential destinations for offshored work.

DiamondCluster spoke to 210 buyers of outsourced services and 242 providers of such services in companies with between 100 and 50,000 employees. ®

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