NEWS
Outsourcing cost savings have been massively over-hyped with the actual cost reduction averaging just 15 per cent, according to new figures from sourcing advisors TPI.
Cost reduction is still the main driver for outsourcing but the research found that when professional fees, severance pay and governance costs are taken into account the highest saving was 39 per cent and the lowest 10 per cent, with an average of 15 per cent cost reduction.
The research covered outsourcing deals awarded between 2003 and 2005.
Duncan Aitchison, managing director of TPI, said 15 per cent is not only a realistic saving but also a significant one.
He said in a statement: "The promise of massive operational savings is unrealistic when you take into account the costs of procurement and ongoing contract management."
TPI's quarterly index of outsourcing deals, based on the pipeline of contracts it advises on, shows that 2006 has seen the largest number of deals ever signed in the first quarter of a year - 83 contracts valued at over €18bn compared to 76 at just over €13bn for the same period last year.
Some of this increase is down to a flurry of outsourcing contracts being restructured, from renewals and extensions to renegotiations.
Contracts worth €6bn have been restructured so far this year and TPI says there are another 141 outsourcing contracts totalling almost €33bn due for restructuring during the rest of 2006.
Around two-thirds of restructuring occurs when contracts come to the end of their term rather than problems with the deal and the incumbent IT outsourcer is retained in 79 per cent of cases - although that is a slight fall from 86 per cent in 2004.
Aitchison warned that it can no longer be taken for granted that the existing IT supplier will retain all or even part of the original outsourcing deal through a restructuring.
He said: "Client retention will increasingly depend on an incumbent’s ability to offer a competitive proposition for every facet of the service and this will often require significant changes in price, contractual terms, scope and delivery approach from the original agreement."
The main IT outsourcers to gain from the first quarter outsourcing bonanza are EDS, IBM and T-Systems who bagged €8.4m of deals between them. The TPI pipeline for the rest of 2006 shows CSC, EDS and IBM in the lead in terms of deal value.
Comments
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1. anonymous
Your story also doesn't take into account the cost of losing customers. I recently had to deal with HP's customer service, now in India, over a defective printer which we bought just one month ago, and the experience has convinced me NOT to buy another HP product. The staff at the Indian service center seems to be completely incapable of holding a conversation in english, and apparently blissfully unaware of the difference in time zones!
I have a significant number of HP printers in my company ... all of which will be replaced by another brand from now on.
2. Mark Kobayashi-Hillary
A classic mistake is looking at offshore costs and comparing salary run rates to produce 'ball-park' savings estimates. One idea might be for companies to require a 12-month post-implementation review of business plans, so all those grand estimates of savings that are probably not achieved (they were there to get a green light on the project) have to be justified by the same manager.
3. anonymous
Does 15% include lost customers???
With Indian Call Centes about as popular as waering a fur coar at a greenpeace convetion, does the 15% include lost custom.
There must be so much back-lash as numerous companies are coming back to UK based and others are using it as a sales feature (Nationwide, Direct Line etc). I must admit that when faced with my renewal from Norwich Union and Direct Line, 1 of the biggest questions I ask myself is "If I need to claim, how difficult do I want it to be?"
4. Louis Chua
Companies that are looking at outsourcing should understand exactly what they are outsourcing. Or they might just outsourced the core competencies and/or be held hostage by their outsource firm.
While advising different banks on their mobile initiatives, I noticed banks that had done outsourcing could not move as fast as banks with internal IT knowledge. e.g. They could not do scoping without scoping how much it cost to scope!
And cost-wise, one bank that had outsourced all its IT staff, found that its outsource firm is charging them 40 times what it cost another insourcing bank!
Basically, the joke going around was that every spelling error on their web site needs a change request that cost the bank 1k.
All the initial cost savings were 'recoup' by the outsource firm within a year.