The IT outsourcing industry is looking to applications services to drive growth in 2003, according to Dataquest Inc.

A November 2002 survey among 36 outsourcing vendors showed that offshore application management was ranked as the highest growth service opportunity for vendors in 2003, followed by near-shore application management.

With the focus on lowest costs, there is a growing adoption of offshore outsourcing, primarily for applications, but also emerging in BPO and IT infrastructure management, Dataquest said Offshore outsourcing accelerated during the past year, and it will continue in the next two years as a means to offer alternative lower-cost labor.

"Already some of the larger services companies have responded to offshore players in the area of applications support by acquiring or setting up their own offshore delivery capabilities through acquisition or significant alliances with lesser-known players,” said Allie Young, chief analyst for Dataquest’s IT Services program, in a press release. “As an alternative to Indian offshore, the near-shore outsourcing market, in particular the Canadian provider market, will be considered by global providers as a way to hedge their bets against political unrest and the potential calamity of a regional war in the Middle East.”

While low-wage countries are attracting attention with application services, IT infrastructure outsourcing activity is hot on a grand scale around the world. As of year-end 2002, there were at least 14 megadeals worth a total of $28.4 billion compared with nine megadeals in 2001 worth a total of $15.1 billion, according to Dataquest. There are at least four pending megadeals, worth an estimated total of $15.3 billion, it added.