Companies will increase the number of IT functions they outsource next year, according to a report from investment bank Merrill Lynch.

The main reason for outsourcing will be to reduce costs, especially when firms decide to use offshore facilities.

Merrill Lynch questioned 100 European and US chief information officers (CIOs), and found 55 percent expected to increase their outsourcing during 2004. Only 15 percent planned to reduce the number of functions they outsource.

The CIOs said the main candidates for outsourcing are applications development and helpdesks. Human resources functions and call centres were also cited as possibilities for outsourcing.

Although outsourcing in general was found to be popular, offshore outsourcing is still a rarity. About five percent of current outsourcing is offshore, according to Merrill Lynch's study.

Of those questioned that had used offshore facilities, almost three-quarters were satisfied with the service. This satisfaction was mainly due to cost savings. Other reasons for satisfaction included cases where offshore outsourcing was easier and cheaper than training in-house staff; projects that ran on time and on budget; and the fact that some firms gained access to a strong skill set at a low cost.

Where companies were unhappy with their experience, the problems concerned difficulties of control and communication and a lack of quality.

The potential cost savings could encourage more organisations to look at offshore outsourcing. According to the survey, the main priority for IT departments in 2004 will be to cut costs.

Most CIOs said that investing in new technologies and increasing IT spending to generate revenue growth would be low priorities next year.

Collectively, CIOs predicted that their IT departments are likely to remain on tight budgets in 2004, and forecast an average increase of just one percent.

A recent study by IT services provider Synstar also found that outsourcing is a popular option for IT leaders at present. Of 700 European IT directors questioned, 71 percent said they would face reduced or static budgets next year. Half of those questioned said that a selective outsourcing strategy could help them do more with less.