"Improving quality and service have become important drivers, and sometimes the real clincher now is time to market," Marshall says.

"A company may have outsourced the writing of software initially to get it done cheaper, but then they discovered that their provider could run three shifts and work on the project 24 hours a day, which improved time to market and gave them a critical competitive edge. By cutting costs and getting to market quicker, a company will have the resources to spend on future product development and customer service. There is no single driver to outsourcing now; there are multiple drivers, and the benefits compound."

And what are companies outsourcing these days? A little more than half (53%) of the buyers said they are considering outsourcing some sort of IT function, most popular being applications management, applications maintenance and full IT outsourcing.

What's more, 60% of the largest companies—more than 10,000 employees—and 67% of companies with 500-1,000 employees are considering outsourcing IT.

In contrast, fewer than half of companies with fewer than 500 employees and 5,000-9,999 employees are interested in farming out IT functions.

The next most popular functions that respondents are considering outsourcing are administration, finance, distribution and logistics, and human resources. In fact, finance, distribution and logistics, and human resources, are the most popularly outsourced functions among the smallest companies—fewer than 1,000 employees—than the mid-size and large companies.

The tasks the survey participants are considering to outsource differ slightly than what they are currently outsourcing. For example, while IT and administration are the most popular tasks currently being outsourced, human resources ranks third, followed by distribution/logistics, and real estate/facilities management. Last year, IT and administration also ranked number one and number two, but they were followed by distribution/logistics, finance and human resources.

Real estate/facilities management (17%), though, has experienced the biggest surge in interest since last year's Index, when just 11% of respondents said they outsourced this function (to read click here). What's more, it is currently the most popular outsourced function among mid-size and larger companies with fewer than 10,000 employees.

While outsourcing clearly is a growth industry with considerable momentum, companies are seemingly scaling back the dollars they plan to invest in outsourcing projects. The mean budget for projects under consideration is $14.4 million this year. However, this figure is heavily skewed upward because the largest companies expect to plunk down, on average, $41.1 million, causing the mean to be high. The median company is planning to spend just $1.6 million over the next year. (Last year's index did not ask participants how much they are considering spending).

However, there is a big difference between what buyers say they plan to spend and how much they are actually shelling out. For, in this year's survey, outsourcing buyers reported they are currently spending $18 million on average. This is up from $17.2 million in 2002.

But, this is not exactly robust growth. The numbers, however, distort the bigger story. "Spending patterns are changing tremendously, especially for offshore outsourcing," notes Veena Gundavelli, chief strategy officer of Emagia Corp., of Santa Clara, Ca. Some companies that tested an offshore market with an outsource provider first have moved on to staffing their own business units there and are spending less on outsourcing, she explains. And companies are looking at more providers with an eye to finding the lowest price and reducing contracts, she adds.

Also, more and more companies are moving from mostly outsourcing huge IT systems to farming out various business processes, whose individual price tags are sometimes a fraction of the mammoth IT budgets. And, an increasing number of companies are moving away from "single-sourcing" to "multi-sourcing," going with two or more vendors.

As was the case with last year's survey, price is still a major consideration when buyers select a vendor. Even so, this factor has declined as a priority, from 65% last year to 62% in this year's survey.

Other findings from the 2003 survey:
After price, buyers selected vendors for their commitment to quality, flexible contract terms and the scope of the provider's resources.

The most important factors for successful outsourcing are selecting the right vendor (62%), managing the ongoing relationship (44%) and a properly structured contract (37%).

The most commonly cited problems associated with outsourcing were lack of time (48%), lack of expertise (44%), limited budget (36%), limited bandwidth (21%), and difficulty in gaining access to service providers (17%).