Tuesday, March 20, 2007

I Can't Get No Satisfaction

Now that the outsourcing trend has well and truly passed the 'hype cycle' and plunged into the proverbial 'trough of disillusionment', global outsourcing advisory firm TPI has shed some light on why firms are becoming increasingly dissatisfied with outsourcing.

For those non-believers that strongly contest firms' dissatisfaction with outsourcing, TPI says it witnessed "a record number of re-negotiations" of outsourcing contracts in 2006, representing almost a quarter of all commercial contract awards made during 2006. "And this trend shows no sign of abating," according to TPI partner Stuart Harris.

TPI's summer 2006 survey of 40 international firms on their experiences of restructuring or renegotiating outsourcing contracts, found that 28% of respondents achieved less value than originally anticipated from outsourcing, with some companies restructuring their agreements within 18 months of having signed them.

But while it may be easy to point the finger at outsourcing providers as the source of dissatisfaction, TPI's research found that 61% of firms conceded that they had placed more emphasis on setting up the outsourcing contract rather than on managing it, and another 52% of respondents blamed their own "unrealistic expectations" as a key barrier to success.

Almost half of the companies surveyed by TPI blamed their "inexperience" in managing outsourcing and 46% said they had failed to fully implement a proper governance structure, with 35% failing to convene regular meetings of governance boards. It harks back to the age old adage, 'You may outsource the problem, but you still need to manage it.'

Yet, while firms have been remiss in terms of their expectations and ability to manage the outsourcing process, outsourcing providers are not entirely blameless. Historically, they have tended to emphasise the 'pros' as opposed to the 'cons' of outsourcing, by highlighting aspects such as cost savings in the region of 50%, without underlining the 'hidden costs' often involved in outsourcing.

Yet, whilst dissatisfaction with outsourcing contracts may be at an all time high, few firms surveyed by TPI had actually severed their relationships. Of the 42% that considered soliciting bids from other outsourcing providers during renegotiation, only 18% actually did so. Similarly, 41% said they considered bringing some of their outsourced work back in-house, but only 13% did.

Yet, as any bank or asset manager will know, moving to a new outsourcing service provider is not as easy as it sounds. "TPI has found that the friction typically involved in making the switch can be quite considerable,” says Harris. And as providers of outsourcing services are aware of buyers' 'weaknesses' when it comes to managing outsourcing contracts, Harris says that perhaps explains why 29% of buyers surveyed said they found their bargaining position weakened at renegotiation, compared with when the deal was originally struck.

It would seem that some outsourcing providers have firms over a barrel as once they are in the relationship, depending on how deep it is and the services it encompasses, it may be difficult for some firms to get out out of a dissatisfying outsourcing contract. And while we occasionally hear of outsourcing deals gone sour, they are just the publicised ones, and are perhaps not a true reflection of the general level of dissatisfaction firms may feel about outsourcing.

1 comment:

Outsourcing Insider said...

Good article! However, some of the statements are very broad in nature. I'm not a political theorist but somehow you exhibit the fallacy of generalization.

It may be right to say that traditional outsourcing providers have not avoided charging their clients hidden costs in outsourcing but it is wrong to fail to mention that there are many of them that offers an open book policy in pricing so as to provide transparency for their clients.