Disappointed corporates bring outsourcing back in house

Many of the world's largest organisations that were quick to participate in IT and business process outsourcing are bringing...

Many of the world's largest organisations that were quick to participate in IT and business process outsourcing are bringing operations back in-house and exploring alternatives, according to a study by Deloitte Consulting.

Issues that outsourcing was expected to address, such as reducing cost and complexity, were found to be the primary reasons for companies' dissatisfaction with outsourcing.

The study, Calling a Change in the Outsourcing Market, revealed that 70% of companies questioned had "significant negative experiences with outsourcing projects and are now exercising greater caution in approaching outsourcing".

One in four had brought functions back in-house after realising that they could be handled more successfully or at a lower cost internally.

The survey found 44% did not see cost savings materialising as a result of outsourcing, and 57% of respondents absorbed costs for services they had believed suppliers were liable for under the contract.

Nearly 50% of participants identified hidden costs as the most common problem when managing outsourcing projects.

"There are fundamental differences between product outsourcing and the outsourcing of service functions - differences that were overlooked but have now come to the fore," said Ken Landis, senior strategy principal at Deloitte.

"Outsourcing suppliers and companies may have conflicting objectives, putting at risk clients' desire for innovation, cost savings and quality. Moreover, the structural advantages envisioned do not always translate into cheaper, better or faster services," he said.

As a result, larger companies are scrutinising new outsourcing deals more closely, renegotiating existing agreements, and bringing functions back in-house with increasing frequency, said Landis.

The study found that companies originally engaged in outsourcing activities for a variety of reasons, including cost savings, ease of execution, flexibility, and lack of in-house capability. But instead of simplifying operations, many companies have found that outsourcing activities can "introduce unexpected complexity, add cost and friction into the value chain, and require more senior management attention and deeper management skills than anticipated", said the report.

Deloitte carried out in depth research with 25 "world-class" organisations with a combined spend on large outsourcing contracts of £26bn. Findings that illustrate the pitfalls include:

  • 62% realised that their outsourced IT required more management effort than expected
  • 57% said they could not release internal resources for other projects, leading to larger than anticipated management overheads
  • 52% ranked cost-related issues as the main risks
  • 81% have limited or no transparency to a supplier's pricing and cost structure, resulting in increased chances of paying additional costs
  • 48% do not have a standardised methodology to evaluate the business case for outsourcing.

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