A study by TPI, the leading sourcing advisory firm, has for the first time revealed the true cost savings delivered by outsourcing.
Research examining outsourcing contracts awarded between 2003 and 2005, has disproved the widespread market claims that outsourcing can reduce costs by over 60%. The study by outsourcing advisory firm TPI found that savings net of professional fees, severance pay and governance costs average 15%.
Duncan Aitchison, managing director of TPI, said, “The promise of massive operational savings is unrealistic. Outsourcing arrangements which focus solely on delivering huge savings often fail to meet expectations.”
TPI’s research showed that cost reduction remained the primary motivation in current outsourcing contracts. However, an increasing number of companies are outsourcing primarily in order to improve quality, up from 11% in 2004 to 21% today.
The study found that 19 restructuring contracts totalling €6bn had been signed so far this year. TPI said a further 141 contracts totalling almost €33bn were due for restructuring during the remainder of 2006. According to TPI, the majority (66%) of restructurings occurred as a result of first generation contracts coming to the end of their term, rather than due to any unhappiness with the provider.
Aitchison said, “Although historically most outsourcing restructurings have been renegotiated with the incumbent service provider, it can no longer be taken as read that the existing provider will retain all or even part of the original deal through a restructuring.”