By Andy McCue, 26 July 2005 15:15
NEWS Almost two-thirds of outsourcing deals are failing because organisations are only paying lip service to the small print in the rush to make cost savings, according to new figures.
The statistics, provided exclusively to silicon.com by management and outsourcing consultancy Compass, reveal that around 59 per cent of all outsourcing contracts fail.
Governance problems are the main issue and cited as the reason for failure in 80 per cent of those contracts. Andy Chestnutt, MD of Compass Management Consultancy, told silicon.com that businesses are still failing to properly address the relationship with the supplier, cultural differences and contract management.
"In the frenzy to make cost savings, companies are only paying lip service to governance and often adopt a policy of 'we'll agree to agree later on' when signing contracts," he said.
Despite the high level of failures and the high profile moves by the likes of JP Morgan and Prudential to bring their IT back in-house the amount of 'in-sourcing' activity is still relatively low at about five per cent.
Yet the headline figures show that the potential savings from in-sourcing a failed outsourcing contract can be as high as 20 to 30 per cent - when both the size of the retained IT organisation required to manage the contract and the profit margin taken by the vendor are taken into account.
But Chestnutt said this attractive headline figure for in-sourcing comes with a large health warning given the trauma and effort required to manage such an exercise.
"Along with the effort needed to bring it back in-house there will be an impact on the books and there are a whole load of other pitfalls that don't make it as attractive a proposition," he said.
The Compass figures are compiled from the consultancy's historical database of thousands of real-life IT outsourcing contracts.
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1. Charles Smith
Outsourcing fails when arranged by incompetent management. It may fail when done for the wrong reasons, when there is poor supplier selection or when poor definition of requirement (contract) takes place.
Little value is placed on the business knowledge transferred or lost when outsourcing takes place. Managers blindly look at cost saving projections yet ignore the real costs of outsourcing. These include increased relationship management, funding hidden services, lower efficiency in client Business Units, profit margin of the outsource supplier.
An interesting statistic would be how many of the managers who initiated outsourcing survive more than 18 months in the slimmed down organisation. In each case of three investment banks that I know of the outsource manager has left the organisation.
2. anonymous
My company decided to go this way too.
In no time, I lost most of my coworkers; and folks from india don't know what they are doing. They a great & hard workeres, but it just doesn't work. They were already told to do something about their productivity & quality of work or "else".
I see more and more companies failing with outsourcing projects, but managemetn doesn't care, it looke great on the books...