FSN: Is Outsourcing strategic? Why settle for less?

Is Outsourcing strategic? Why settle for less?

4th February 2008
Over the course of the years FSN has been flooded with surveys, usually commissioned by Outsourcing providers, lamenting the apparent inability of companies to look beyond cost savings as a motivation for outsourcing a part of their business. Proclaiming for themselves considerable untapped strategic capability the outsourcers bleat that companies are failing to leverage the broader competencies they have to offer. But after yet another survey pointing to the more limited desire for cost savings one is entitled to ask whether the outsourcing industry is flogging a dead horse? Gary Simon FSN's managing editor looks at the issues.

“While outsourcing is generally recognised as a strategy for producing cost savings, few surveys to date have utilized a large enough sample of respondents to provide an accurate estimate of the actual amount of these savings,” says Deloitte Consulting in a new global survey released last week.

The study, entitled “Why Settle for less?” surveyed a group of 300 executives who are actually involved with outsourcing services worldwide. The main finding is that 83% of all respondents reported that their projects had met their ROI (Return on Investment) goals of slightly above 25%!

After decades of debate about whether outsourcing is actually cost effective it seems that the Deloitte Consulting survey compellingly shows that in the overwhelming majority of cases companies are pretty happy about the financial outcome. Furthermore, the survey results confirmed that cost reduction is the primary factor motivating most outsourcing decisions. 64% of executives surveyed said a desire to reduce operating costs was a key driver of their decision to outsource for the largest outsourcing contract they were involved with, while 49% cited the related objective of obtaining less expensive labour. The second most important reason was to gain access to technology expertise, cited by 56% of executives. Lack of in-house resources is cited as the primary motivation for outsourcing in 40% of cases.

This is all rather inconvenient for an industry that is seeking to re-invent itself and maintain growth against the backdrop of structural change and increased competition. Undaunted the Deloitte Consulting survey sweeps aside its major finding saying, “Despite this apparently positive result we believe that the true potential of outsourcing is still not being fully achieved, hence the title of our report, “Why Settle For Less?” ”.

So what are the structural changes and how is the outsourcing industry trying to re-position itself? Whilst the Deloitte survey points to a high degree of satisfaction with the financial outcome of outsourcing arrangements this has not always been the case. Early generations of outsourcing deals were dogged by disputes and questionable financial outcomes. But lessons appear to have been learned from these experiences and whilst second or third generation arrangements are still likely to be awarded to the incumbents, the deals tend to be smaller and of shorter duration. This is thought to reduce risk by making the contracts more manageable.

Outsourcing arrangements have also broadened and whilst the earliest contracts related to IT infrastructure, help desks and the like, recent years have seen the rampant growth of finance and administration outsourcing and an emerging trend towards HR outsourcing . Also in the mix is the growth of shared service centres and business transformation programmes which aim to re-fashion processes to make them more efficient. Quite often this is in anticipation of establishing a shared service centre and is frequently accompanied by off-shoring.

As a result of these trends the business landscape is becoming more competitive, large numbers of low cost outsourcing providers situated in developing economies have entered the fray and traditional outsourcers are feeling the heat . In an effort to differentiate their offerings there has been an effort on the part of leading outsourcing providers to present themselves as more of a strategic partner that can help to bring about change or create competitive advantage.

But do companies want a “strategic” partner, (in the sense of participating in strategy) or do they simply want to reduce costs and offload old technology so that they can concentrate on developing their core requirements utilising the limited skilled resources at their disposal?

On the face of it the Deloitte survey seems to be saying “Yes” to cost reduction and a muted “Yes” to other more strategic aims. For example, n ot only had the great majority of the respondents achieved their ROI goals, but a majority (70%) stated that they were “satisfied” or “very satisfied” with their arrangements – the highest level Deloitte Consulting had ever seen reported!

Scratching around for something less positive to say the study pointed weakly to the fact that only 34% of the executives reported that they had gained important benefits from innovative ideas or transformation of their operations. Perhaps this says more about the quality of the outsourcing providers than any lack of ambition on the part of companies. It's an important point that outsourcers are going to have to confront if their broader ambitions are to be taken seriously. It is one thing to provide buckets full of bright young graduates in India to develop software, run a shared services centre or man a help desk but it is quite a different prospect to formulating and supporting strategy development with Boards of Directors.

Unsurprisingly outsourcers canvassed in the survey suggested that client companies “may not be positioned to realise the full benefits of outsourcing claiming by a 3-to-1 margin, that their client companies were not prepared for outsourcing — that is, the companies didn't have a solid plan, didn't have the operational data needed to make sound outsourcing decisions, and/or didn't understand how the “to-be” organisation would really work. For companies so unprepared they seem to have done amazingly well to achieve the satisfaction levels they report!

Nevertheless Deloitte insist that “by following a traditional cost-focused approach to outsourcing, we believe most companies are under utilizing this key strategy, and missing opportunities for tremendous benefits. But companies that view outsourcing in a broader strategic context, and implement it systematically, can gain a competitive edge over those that remain stuck in a traditional procurement mind set.”

This may be true but the message seems to be falling on deaf ears. Why settle for less? May be because companies are not convinced that outsourcing is a source of strategic advantage! The outsourcing industry needs to wake up to the reality that outsourcing is and probably always will be seen by the majority of companies as a cost reduction exercise.

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