Outsourcing Clients Getting More Cost Conscious


A while back, I spoke to Charles Aird, a senior managing director for PricewaterhouseCoopers, to glean his insights on outsourcing for the coming year. Not surprisingly, much of what he told me relates to outsourcing clients' desire to maximize their savings.


In the short term, clients are assessing their contracts to ensure they are getting the expected benefits, auditing invoices and tracking credits and penalties more closely. Doing so can result in cost reductions of up to 15 percent, says Aird.


In the longer term, clients see outsourcing as a more cost-effective way to move toward a centralized shared-services environment, since they can amortize costs across the length of contracts with providers, he says. They also hope to use savings generated by outsourcing to finance more strategic projects.


Maybe so, but outsourcing was identified by CIOs surveyed by Citi Investment Research as one of the areas most likely to suffer from budget cuts in 2009, as I wrote earlier this month.


An increased focus on saving money is evident from results of a recent survey in which PwC noted shifts in what its clients are seeking from outsourcing initiatives. Seventy-four percent say labor costs are more important now than they were before. Compare that number to those who said enhancing efficiency through business process redesign was now more important (55 percent), global strategy (39 percent) and gaining access to talent (32 percent).


Cost-consciousness will likely lead to a reduction in the kinds of sweeping transformation projects in which providers are asked to contribute innovative ideas. An InfoWorld article quotes Stan Lepeak, research director of EquaTerra:

The focus will shift away from open-ended efforts. Buyers will not have much appetite for transformation in 2009.

As with any other business investment, financing projects is becoming a bigger issue, says PwC's Aird. Thirty-one percent of clients told PwC they were delaying projects due to a lack of financing, 25 percent are continuing projects with original financing in place, 23 percent are trying to spread implementations over a longer period of time, 9 percent are asking service providers to finance projects and 14 percent are looking for third-party financing.


The need for new finance models could lead to more deals like one mentioned by Aird, in which a private-equity firm is considering taking a financial stake in a PwC client's business-transformation project involving an ERP implementation combined with a shared-services model. If the project is successful, the same model could be tweaked and sold to other companies, says Aird.