[IP] Deloitte's damning study (on outsourcing, not just offshoring)
Begin forwarded message:
From: cdseaman <cdseaman@xxxxxxxxxxx>
Date: May 22, 2005 7:02:09 PM EDT
To: cdseaman@xxxxxxxxxxx
Subject: [johnmacsgroup] FW: Deloitte's damning study (on
outsourcing, not just offshoring)
Reply-To: johnmacsgroup@xxxxxxxxxxxxxxx
[From my experience these companies would save a lot and be able to
control their business and costs much better by keeping outsourced work
in house. - cds]
http://www.cio.com/blog_view.html?ID=341
Christopher Koch
May 20, 2005
The Answer That Lacks A Problem
MAY 20, 2005 06:40:23 AM
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.
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