Changing views on outsourcing

A recent study by Deloitte Consulting has sparked renewed debate about the business value of outsourcing mega-deals. The study, published in April, found that nearly 75 percent of the 25 large companies surveyed have had negative experiences with their mega-outsourcing projects.

The study found nearly half of these firms have failed to see the cost savings they anticipated from these outsourcing arrangements. As a result, 25 percent of the companies surveyed have brought outsourced functions back in-house.

These high dissatisfaction and failure rates should come as no surprise to those who have followed the outsourcing business. Many market research firms also suggested that more than half of these deals would fail, even while forecasting substantial growth in both traditional IT outsourcing (ITO) and business-process outsourcing (BPO).

Thinkstrategies recently teamed with the Cutter Consortium to conduct a unique industry survey that compared and contrasted the perceptions of more than 200 enterprise decision makers and IT/network solution providers regarding some important outsourcing issues. We found dramatic differences in the way these two groups view their outsourcing objectives, preferred operating frameworks, contracting time tables and business benefits.

As a consequence of these disparities and traditional outsourcing’s dismal success rate, many companies are becoming more discerning about their outsourcing arrangements. Instead of offloading entire IT or business operations to a third party, they are now contracting for more narrowly focused outsourcing services.

A Datamonitor and Everest Group study has quantified this trend, finding the average size of an outsourcing deal fell 18 percent in the first quarter of 2005 compared with a year ago. This decline came despite a 5 percent increase in the number of deals signed in the quarter compared with the same period in 2004.

According to Thinkstrategies’ research, the three main reasons for the high failure rate of large-scale ITO and BPO projects are:

— Inaccurate assessments of a company’s current IT/business performance levels.

— Unrealistic expectations of outsourcing’s cost benefits and performance improvements.

— Inflexible outsourcing agreements that lack proper reporting and resolution procedures.

These factors are fueling the growth of application and managed services. These pay-as-you-go subscription services pose less risk to companies than traditional outsourcing.

They also pose an enormous threat to ITO/BPO vendors that have relied on long-term mega-deals to support their costly service delivery infrastructures and staff.

While many ITO/BPO vendors are attempting to reshape their operations and offerings to accommodate users’ changing requirements, enterprise decision-makers should carefully evaluate the outsourcers’ ability to cost-effectively deliver more narrowly focused subscription services that truly match their company’s goals and objectives.

— Kaplan is managing director of Thinkstrategies, a consultancy in Wellesley, Mass. He can be reached at [email protected]

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