Study: Outsourcing losing its sheen

Cheaper, better, faster? New Deloitte Consulting research suggests the paradigm for outsourcing is no longer valid.

If you're still looking a data center outsourcing as a guarantee for lower costs, greater capability and more flexibility,

take off the rose-colored glasses. Plenty of senior executives whose companies spend billions on large outsourcing contracts have done just that.

At least that's the message in a recent Deloitte Consulting survey of senior executives at 25 large companies: 70% said they had "significant negative experiences" with outsourcing projects -- and now they approach outsourcing with more caution than before.

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Instead of simplifying operations, these executives said outsourcing often added complexity and increased operational costs.

The result? Many are bringing operations back in-house and exploring alternatives to traditional outsourcing models.

The sampling, though small, carries plenty of clout. The companies surveyed have a combined market capitalization of $1 trillion and together spend $50 billion on large outsourcing projects.

The Deloitte study, "Calling a Change in the Outsourcing Market," asked executives to cite their main reasons for outsourcing, and found their rationale often at odds with their market experience. The study found:

  • 70% cited cost savings as a key driver for outsourcing, but 38% said they ended up paying hidden or added costs they thought were included in their contracts.
  • 57% cited quality and innovation, but 31% said vendors became complacent once contracts were in place.
  • 35% cited flexibility and capacity, but comments revealed that contracts are binding and vendors, often rigid, are refusing to accommodate last-minute changes.
  • 22% cited access to high-caliber labor, but one in five experienced greater employee turnover and realized the intellectual capital they had paid for was fleeting.
  • 22% cited transfer of risk to vendors, but they said vendors were unable to fully absorb the costs of business losses, leaving the company on the hook for paying the bill.
  • 16% said they outsourced because they lacked the in-house expertise, but 44% found their vendors couldn't deliver on the quality and cost savings and they decided to bring the operations back in-house.

Part of the problem, the study contends, is that the old paradigm for outsourcing no longer applies. Outsourcing was originally a cost-saving strategy during a recessionary economy. The Deloitte study found that saving money is still the main reason companies decided to outsource, but savings are elusive. Most companies want tailored outsourcing deals, which reduce the vendor's ability to deliver savings based on economies of scale.

Moreover, as outsourcing has moved from manufacture goods to services, it is harder to quantify results.

The disenchantment with outsourcing is echoed by other surveys, according to Deloitte.

Meanwhile, a Dun & Bradstreet survey shows that 20% of outsourcing relationships fail in the first two years, and 50% within five years.

A DiamondCluster International survey found that 78% of executives terminated agreements early due to poor service, a change in direction or costs.

"The world's largest organizations are calling into question its efficacy in today's economy."

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