By Steve Ranger, 21 April 2005 16:30
NEWS Major companies are turning their backs on outsourcing because the strategy has failed to cut their costs.
According to research by Deloitte Consulting, companies that were quick to participate in outsourcing are bringing operations back in-house.
More than two thirds of respondents to the Deloitte survey said they have had "significant" negative experiences with outsourcing projects.
One in four participants have brought operations back in-house after realising that they could be provided better and in some cases at a lower cost internally.
Cost savings expected from outsourcing did not materialise for 44 per cent of respondents, and nearly two out of three ended up paying for services they thought were included in the contracts with vendors.
Deloitte's senior strategy principal Ken Landis said outsourcing vendors and clients may have conflicting objectives: "The structural advantages envisioned do not always translate into cheaper, better or faster services. As a result, larger companies are scrutinising new outsourcing deals more closely, re-negotiating existing agreements, and bringing functions back in-house with increasing frequency."
The study found that instead of simplifying operations, many companies have found that outsourcing can add unexpected complexity, cost and "friction" into the value chain, and require more senior management attention than anticipated.
Over half of the 25 "world-class" organisations interviewed said they could not free up internal resources for other projects, leading to larger than anticipated deal management overheads.
"In the near term, outsourcing will become less appealing for large companies because it is not delivering the value as promised, and its appeal as a cost-saving strategy will also diminish as the economy recovers from recession and companies look for differentiated solutions to support their growth," said Landis.
Comments
There are 14 comments. Join the discussion
1. naveen varshneya
Steve,
It looks like there is some other motive behind such reports. It has some silly points such as companies not reading contracts and getting into higher cost and that management has to spend more time and can not free resources.... get your facts right buddy... your intent in not right. you played smart by not naming companies and countries to whom outsourcing is done... good luck with such scooping stuff... you loose your credibility with readers of newsletter
2. Hid S
Astounding.
We've moved from reports a few years ago saying that every company worth it's salt should outsource or face going bankruptcy to a report now saying that it's not as good as it seems.
Basically, the plan was to:
Tender your IT support out to the cheapest bidder who has absolutely no idea about your own business, who have other customers and at the end of the day, really don't care about your problems (oh it's 5pm, time to go home!!)
Comparing it to:
An in-house team who are/become experts in your business, you can reach them at any time and who works FOR your own company, instead of someone else.
Hmm.. this seemed like a good idea .. why?
3. S Bradbury
If they had used UK companies as opposed to Indian/overseas companies they would have had a better experience. Companies in their own country have a better understanding of their business than the overseas companies.
4. anonymous
If companies were expecting that they will get great results for no money at all, they cannot end in a different situation than the described one. When one is greedy and wants cheap, cheap, cheap things, that is a deserved punishment.
There have been many outsourcers who consider $100 as a considerable amount of money that will buy them utmost quality. Anybody feeling sorry about those "disappointed" guys?
If you need quality at a lower price - pay the price, even if it is not as low as you dream of.
5. Dick Winchester
Surprise, surprise... Took them long enough to realise this.
Must be less MBA grads running companies nowadays. An excellent trend IMHO.
6. anonymous
EXCELLENT news..
When can we have the call centre industry back, and UK start to thrive again..
There are 5000 ex car workers who I am sure would jump at the chance of earning a little bit of money, even if it is minimum wage, at least its kept in.
Bye Outsourcing industry, I am not sad to see you go...
7. anonymous
Yes, I heared outsourcing is increasing and such reports are needed sometimes to check the internal resistance.
8. R Gilchrist
As individuals we're constantly told "If it looks to good to be true, it probably is too good to be true".
Yet with outsourcing this little mantra seems to go out of the window.
I'm sure there are some deals which have worked out well, but my experience of outsourcing as a consumer has almost universally been poor.
9. anonymous
I was outsourced from a good IT department in a large company to an IT services provider. The experience has been very negative for those of us outsourced and the service we now provide is far worse than than we provided in house.
The staff in-house are very dissatisfied with the service they now get, and the delays, poor standards, etc make their jobs much harder
But the move looked good to the shareholders and the directors can claim they made big savings, so they just don't care.
10. anonymous
Depends what is strategic and what is non-strategic...Strategic activities should never be outsourced...on the other hand, companies must cut cost on their non-strategic activities...doesn't matter if its in-house or outsourced. Surprisingly, many senior business leaders don't understand that!!
11. Guy Kirkwood
Ken Landis should talk to his colleagues; or at least read his own corporate website (http://www.deloitte.com/dtt/section_node/0%2C1042%2Csid%25253D5198%2C00.html).
What is sauce for the goose is also sauce for the gander.
12. Peter Jordan
As a software process improvement manager for a medium-sized company, I had constant conflict with managers about the advisability of outsourcing IT. Accountants are enthusiastic for outsourcing; but they tend to ignore the real costs which include management of the contract, communication overheads, delays, non-availability of resources in emergencies and just good old-fashioned misunderstandings.
It's no surprise to me that outsourcing is less attractive than thhe hype suggests. I predicted this when the trend started, I dealt with the problems when they arose, and now I am laughing as people belatedly "discover" problems that I predicted.
External IT suppliers focus on meeting their targets by SOLVING problems. What is needed is a focus on PREVENTING problems. This is more likely with an in-house IT organisation.
13. Gavin Astill
In my (public sector) experience the combination of commercial naivety on the part of the organisation outsourcing, and commercial 'sharp practice' on the other side always leads to unhappy results. A company thinking of outsourcing IT has to realise from Day 1 that they have to be very commercially tough for it to work, and to forget any quaint ideas about it being some sort of 'partnership'.
14. Shain George
Steve, I do not know how scientific the survey of Deloite was. However, I am sure that outsourcing could not be as black and white as you have reported in this article. The evaluation of outsourcing should be done in many dimensions, especially on the nature of the outsourced activity and the management of outsourced activity. An activity should be outsourced only if it is not a value-added activity to the business. For example, an advertisement firm should not outsource its creative activities. But, it can outsource the printing of leaflets etc. The second dimension, the management of outsourcing, is a pure contract management activity. If the organisation does not have an effective contract management system, better not to engage in high value outsourcing activities.