Tide turning against outsourcing

2005

Many large organisations that outsourced IT and other services over recent years are bringing some operations back in-house as the benefits they expected to see fail to materialise.

A new study by Deloitte has uncovered widespread dissatisfaction with outsourcing as organisations find that the process is far more complex than initially anticipated.

Seven out of 10 of the firms surveyed have had negative experiences with outsourcing projects, with dissatisfaction with cost savings and reduced flexibility the primary problems encountered.

The 25 organisations who took part in the research currently spend $50 billion annually on outsourcing.

But a quarter of them have brought functions back in-house after realising that they could be addressed more successfully and/or at a lower cost internally, while almost half (44 per cent) failed to see cost savings materialising as a result of outsourcing.

"In the short-term, outsourcing may become less appealing for large companies because it is not delivering the value as promised, and its appeal as a cost-savings strategy will also diminish as the economy recovers from recession and companies look for differentiated solutions to support their growth," said Richard Punt, strategy partner at Deloitte.

"However, outsourcing can still deliver value to companies that enter into outsourcing for the right reasons.

"Large firms need an in-house team trained to manage these deals from inception to execution, and they should look for vendors to match their needs with transparency."

According to the study, participants originally engaged in outsourcing activities for a variety of reasons: cost savings, ease of execution, flexibility, and lack of in-house capability.

But instead of simplifying operations, many companies have found that outsourcing activities can introduce unexpected complexity, add cost and require more management attention than expected.

Almost two-thirds (62 per cent) found out the hard way that outsourcing deals required more management effort than they had anticipated.

Yet one reason that outsourcing causes so many problems also emerges from the research. Almost half (48 per cent) of the survey's participants admitted that they do not have a standardised methodology to evaluate the business case for outsourcing.

"There are fundamental differences between product outsourcing and the outsourcing of service functions, differences that were overlooked but have now come to the fore," Richard Punt added.

"Outsourcing can put at risk the desire for innovation, cost savings, and quality. Moreover, the structural advantages envisioned do not always translate into cheaper, better, or faster services.

As a result, larger companies are being more considered in their approach to outsourcing. New outsourcing deals are scrutinised more closely, re-negotiating existing agreements are being re-negotiated, and some functions are being brought back in-house."

Looking at the UK market, Punt argues that outsourcing remains a growth area. "This study has a global application but the primary focus is on the US – which has moved faster into outsourcing than the UK and the rest of Europe.

"Outsourcing remains a valuable business strategy provided the conditions are right. Both customers and vendors have the opportunity to from mistakes made by those who entered into outsourcing early."