One third of firms are spending too much on managing suppliers

One in three companies are spending more money than necessary on managing outsourcing contracts, according to an extensive survey...

One in three companies are spending more money than necessary on managing outsourcing contracts, according to an extensive survey of users.

Of the UK business and IT executives questioned by outsourcing advisory firm Morgan Chambers, 33% said they spent more than 7% of the total annual contract value on managing the deal - the maximum amount recommended by Morgan Chambers.

Some 23% said they spent more than 10% of the contract's value on managing their service providers, compared to 33% who spent 3%-7% and 25% who spent less than 3% on managing their outsourcing suppliers.

With IT outsourcing being pushed by suppliers as a way for organisations to reduce their running costs, the report's findings are likely to raise concerns in boardrooms and IT departments across the UK.

"To find 30% of clients spending more than 7% of total contract worth is extraordinary," said the report. "However, the most worrying statistic is that 23% of clients spend more than 10% of the total contract spend on managing the service providers. This disproves cost savings as the number one driver for the original outsourcing."

Phil Morris, director of Morgan Chambers, said over-spending on contract management could cost a company £300,000 on a £10m outsourcing deal.

"Some of this is layers of duplication and not letting outsourcers do their job properly by micro-managing them," he said. "But you do not tend to do this if you trust an outsourcer. IT directors need to ensure that they are not doing the job of the supplier to validate that the supplier is telling the truth."

However, he added that outsourcing suppliers needed to provide better value to users by being more innovative and helping to cut costs in a wider range of areas.

The survey asked business executives to rate their outsourcing providers on 10 criteria, including willingness to shoulder risk, innovation, and helping the user cope with new regulations and legislation.

The top three suppliers in the "shouldering risk" category were T-Systems, a division of Deutsche Telecom, Atos Origin and offshore outsourcing providers (including Wipro, Infosys and HCL), which were grouped into a single category.

When judged on their ability to identify innovative technology and business processes, Siemens came top, followed by Xansa and Logica CMG.

"More clients disagree than agree that their service provider identifies innovation opportunities or leverages their own organisation to the benefit of the client's business. Given the large annual spend of these organisations on innovation in hardware and software and processes, this is a very sad indictment of the industry as a whole," said the report.

Outsourcing suppliers also have an increasingly important role to play in helping companies to comply with a proliferation of corporate governance and data-related regulations, such as Basel 2 and Sarbanes-Oxley.

Unisys was ranked as the top supplier for its ability to cope with new regulations, followed by T-systems and Hewlett-Packard.

A final version of the report is due to be published at the end of this month.

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