IT outsourcing is not going away anytime soon, but the market is in the midst of some big changes as we report this week. New analysis by Gartner, a leading information technology research and advisory company, says we are at the start of a dramatic upheaval in the business process outsourcing industry that could lead to the demise of one of every four firms during the next three years.

Some firms will be bought out, there will merge and some will go out of business. Such activity is normal, but Gartner predicts the pace will be rapid and the change dramatic. This is quite a startling prediction, and if true, it means this will not only affect the outsourcers themselves, but the businesses they serve.

The report comes just as Dell has announced a takeover of Perot Systems and the surprise move by Xerox to buy up ACS for $5.8 billion. The reconfiguration of the outsourcing industry appears to be a product of the global financial crisis. Some firms were closely linked to the financial sector, and when the collapse occurred, their business and profits went into the tank.

Others made bad business decisions, entering into unprofitable contracts to remain competitive, and then did not build their business to cover the costs.

"As providers are exposed to the economic crisis, loss making contracts, and an inability to adapt to standardized delivery models, many will struggle to survive in their current form," said Robert H. Brown, research vice president at Gartner.

The Gartner report offers a warning sign to CIOs and business executives. It means businesses looking to enter into outsourcing contracts need to carefully evaluate the vendor, and look for warning signs of possible trouble, in order to mitigate the risk.

This means that IT executives need to ask outsourcing firms for information on their current contracts and new business activity and profitability, and press for the data even if they are reluctant. A lack of transparency is not a good sign, and not an approach that you want in an important business relationship. If a vendor is heavily leveraged, its future may be shaky, and it may not be able to make the investments needed to fulfill contracts. 

Gartner suggests that businesses entering into contracts with outsourcers should build in exit strategies and develop contingencies for contract termination, especially before signing the deal.

These are crucial issues. Entering into a BPO deal means a company is entrusting the outsourcing firm with crucial business functions such as running the IT shop for an entire department, such as finance or human resources. A vendor going out of business, facing financial problems or merging can have a big impact and be very disruptive to a business.

Gartner's warnings and advice are sound. Carefully screening potential vendors, building exit strategies into contracts and developing contingencies for contract termination before signing the deal are all wise moves that should be followed, especially in these uncertain times.