Outsourcing for Strategy? Good, Because You May Not Save Money

Ann All

Despite companies' spin on the strategic value they gain from outsourcing, observers like Gartner say that cost cutting remains the primary objective of most outsourcing agreements.

 

So what will companies make of a recent report from Compass Management Consulting, which found that IT outsourcing and BPO deals actually end up costing companies money -- at least in deals valued at more than 20 milion (U.S. $40 million)?

 

According to the report, outsourcing providers delivered such services for 18 percent less than companies could do themselves during a contract's first year. But then costs grew rapidly, so that by the third year of a contract, companies were paying 36 percent more than they would if the services were provided in-house.

 

Another scary statistic: Compass found that more than 65 percent of such contracts ended in premature cancellation of a contract. As Compass' head of business development and marketing bluntly puts it:

"There can be sound strategic reasons for outsourcing but saving money over the long term is not one of them."

While we were still mulling this over, we saw a BankNet 360 article detailing a recent Booz Allen Hamilton/Duke University Fuqua School of Business report that found that banks are not saving as much money as they'd like with their offshore deals. According to that study, the financial services industry attains 39 percent cost savings by offshoring labor -- less than the expected 45 percent.

 


Though some might read them that way, these studies don't suggest to us that companies will give up on outsourcing. Rather, they support the widely-observed move away from monolithic mega-deals in favor of smaller, multiple contracts.

 

A Duke University professor suggests in the BankNet 36o article that companies will also look to providers with operations in smaller cities in hopes of achieving additional cost savings, rather than working with providers in places like Bangalore. We recently spotlighted an outsourcing provider located in India's rural Andhra Pradesh state that is hoping to capitalize on this trend.



Add Comment      Leave a comment on this blog post
Apr 23, 2007 6:46 AM Gary M. Zeiss, Esq. Gary M. Zeiss, Esq.  says:
There are a multitude of reasons that outsourcing fails to deliver the promised cost savings. These include poor governance, overly-optimistic projections, scope creep and vendor lowballing (counting on making it up later).That companies are realizing this now is probably a large reason for the slowdown in the US outsourcing market that has occurred during Q1 of '07. However, it is not yet clear that the realization of the problem will lead to a more balanced, realistic view of outsourcing among businesses.For a company to outsource successfully, it must put a governance team in place that is appropriately empowered to govern the relationship. This should be their first priority. Rosy predictions of fantastic savings should be taken for what they are - sales puffery (either by the vendor or the in-house champions). At the end of the day, simply counting on outsourcing to solve inefficiencies in one's business is akin to seeking a silver bullet to cure one's woes - nice idea, but it won't take the place of realistic, smart management and true value creation. Reply
Dec 9, 2008 8:34 AM alex alex  says:
Add to my Bookmarks ;) Reply

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