Outsourcing 'derailed by focus on ROI'

Focusing too closely on return on investment figures is the key reason for IT outsourcing projects failing, according to a study by consultancy Compass.

Focusing too closely on return on investment figures is the key reason for IT outsourcing projects failing, according...

to a study by consultancy Compass.

"Up to 65% of all outsourcing contracts worth more than £20m unravel before running their full term," said Simon Scarrott, head of business development at Compass, which analysed 240 IT outsourcing contracts over 24 months.

The most common reason for failure was that the outsourcing contract did not deliver the promised cost savings.

However, Compass said that the fault generally lay with users, who were putting too much pressure on outsourcing suppliers to deliver at a cost that was unsustainable in the long term.

Compass's findings also revealed that outsourcing providers were pricing contracts to show immediate savings of up to 18% on the in-house operation being replaced. Costs then increased to an average of 30% above the original in-house cost by year three of the contract.

"With those figures, it is easy to see why the claim that all outsourcing will save money is a myth," said Scarrott. "There can be sound strategic reasons for outsourcing, but saving money over the long term should not be one of them."

Because of this, outsourcers cannot perform 'alchemy' on a business process and make cuts where no cuts can be made, he said. While labour costs can be cut by offshoring to countries like India, Compass explains that this is usually offset by the number of customers lost through dissatisfaction with a deteriorated service.

"In the case of an IT helpdesk, language barriers or unsympathetic poorly trained call centre staff could lead to calls being terminated through frustration," said Gareth Thompson, a spokesman for the company. Rather than focus on the cost of employing per person per hour, businesses should look at alternatives, such as the cost of not resolving each response, per customer."

Most FTSE firms renegotiate terms >>

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Compass >>

Compass Consulting >>

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