A Look at Deloitte’s Outsourcing Study

I have yet to find a more damning assessment of the strategic impact of IT outsourcing than this report from Deloitte. It says that the era of huge outsourcing deals is over and that the companies that have done these deals are retreating from them. The companies surveyed (25 Fortune 500 companies) still view cost savings as the primary benefit they expect from outsourcing (83 percent). Yet their experience seems to argue against the logic of this expectation.

For example, 73 percent of those surveyed said they use multiple vendors to protect themselves from lock-in and high prices. Yet outsourcers derive their cost savings from economies of scale. Companies that spread the same work across multiple vendors reduce the potential savings. Moreover, having multiple providers increases the management time, money and manpower needed to manage the complexity of multiple contracts–62 percent said managing the vendors requires more management effort than originally thought and 57 percent said they could not free up internal resources to do other projects after outsourcing.

For the sake of argument, let’s say companies split up their work among multiple vendors discretely, with no overlap. Yet 100 percent of the respondents said that they tailor their deals with their vendors, meaning that the vendors have limited capability to lump the work in with other customers and achieve those economies of scale.

Risk also seems to be a constant companion in these deals–mostly risk of the unknown. The survey said 57 percent of companies paid additional costs for things they thought were included in the contract and a vast majority said they had limited (48 percent) or no (33 percent) visibility into their vendors’ pricing and cost structure. This lack of understanding results in contract changes–64 percent of companies surveyed had brought some services back in house.

Yet despite all this, 65 percent of respondents say they are saving money by outsourcing. Perhaps it’s the offshoring effect: 23 percent of the companies surveyed were sending more than 50 percent of the work offshore while 38 percent were sending less than 50 percent.

About half those surveyed said they thought CIOs could compete with outsourcers–48 percent agreed or partially agreed that few vendors (except infrastructure vendors) have economies of scale greater than their big customers.

It seems that the big, kitchen-sink outsourcing deals are another example of poor relations between IT and the business. Unless the business is facing a sale or merger and needs to get costs off the books at all costs, the risks of outsourcing–at least as portrayed in this report–can smother cost savings. Deloitte’s suggestions for reducing risk, which include focusing on commodity outsourcing or using outsourcers to reinvent a failing department or process, seem fraught with risk, too, given the tendency to customize the deals and the lack of visibility that companies have into vendors’ operations.

With cost savings far from guaranteed, companies need to have other reasons for outsourcing. But they don’t seem to bother coming up with them. The most telling question of all those in the survey was this: “Did you outsource a function in order to solve a specific problem?” Frighteningly, 83 percent said no. If the vendor isn’t brought in to fix a problem–i.e. come up with a better way of doing things–companies are throwing away the opportunity to reduce risk and manage the vendor to real benefits (like cost reduction). Why is this critical factor seemingly absent from these contracts? Give me your thoughts.