Outsourcing requires homework
April 1, 2008
Whether a processor outsources procurement, manufacturing, product innovation, IT services or business processes, there’s no doubt that, if executed properly, outsourcing can save money and take the pressure off several business tasks. But many companies don’t do homework first, according to a Deloitte Consulting 2008 outsourcing report entitled “Why Settle for Less?” Deloitte surveyed a group of 300 executives directly involved with outsourcing services worldwide and found some surprising results.
83% of all respondents reported their projects met their ROI goals of slightly above 25%. A majority (70%) were satisfied or very satisfied with their outsourcing arrangements. However, 39% reported they had terminated at least one outsourcing contract and transferred it to a different vendor. Of those who were dissatisfied or very dissatisfied with their largest contract, 50% had brought the function back in house, and 61% reported they had escalated problems to senior management in the contract’s first year. While most executives reported outsourcing was working financially, their relationships were not without problems.
Of the 70% majority, only 34% of the executives felt they gained important benefits from innovative ideas or transformation of their operations. Thirty-five percent of executives, including 55% of executives who were not very satisfied, wished their companies had spent more time on vendor evaluation and selection. If they could start over again, 49% of the executives surveyed said they would define service goals that aligned better with their companies’ business goals. The dissatisfied respondents saw underestimated scope, higher-than-expected costs and poor quality communications, service and reporting from their service providers.
The survey also included 31 service provider executives, who by a 3-to-1 margin felt their client companies were not prepared for outsourcing, didn’t have a solid plan, didn’t have the operational data to make sound outsourcing decisions and/or didn’t understand how the to-be organization would really work.
The report emphasizes that executives should consider cost reduction as a “given,” rather than a primary driver in outsourcing, and look at innovation and transformation as real benefits. But attempting to fix a dysfunctional operation through poor planning and lack of due diligence will result in failure. As the report says, “outsourcing initiatives succeed by design, not luck.”