Half of all outsourcing deals in Europe are falling short of expectations, industry analysts have warned.

According to analyst Gartner, rapid growth in outsourcing will force businesses to focus on 'relationship management' in 2004 as they become increasingly dependent on complex, long-term relationships with service providers.

The analyst pinpointed internal technology teams as the primary weakness in many outsourcing deals.

"The internal team is frequently overworked and undervalued and lacks the skills and tools to perform complex business-critical roles," said Roger Cox, managing vice president at Gartner.

"Companies should invest three to four per cent of the total [IT] budget in the critical skills and know-how required to build high-performance relationships. This is not optional, it is business critical."

According to Gartner, companies focus excessively on the process of selecting a service provider and negotiating the deal at the expense of working out how to make the deal work for the business.

Outlining four critical stages in the outsourcing life cycle - sourcing strategy, evaluation and selection, contract development and sourcing management - the analyst said that companies should start at the end by defining the management stage.

The study found "significant correlation" between the quality of business and behavioural skills and the overall success of outsourcing deals. Organisations with a predominately technical team were found to have poor outsourcing deals.

"IT leadership will remain the most important role, but the need for roles and skills to manage supplier relationships is increasingly important as organisations become more dependent on external, and increasingly global, service provision," said Cox.

"Few [IT] organisations currently have the career paths to develop these skills."