A study by TPI, the sourcing advisory firm, claims to reveal for the first time, the true cost savings delivered by outsourcing. The research, which examines outsourcing contracts awarded between 2003 and 2005, disproves widespread market claims that outsourcing can reduce costs by over 60 per cent. In reality, savings net of professional fees, severance pay and governance costs average 15 per cent and range between 10 per cent at the bottom end and 39 per cent at the top. 15 per cent is also the average level of savings anticipated when contracts are first let.
Duncan Aitchison, Managing Director of TPI, commented:
"Opinions vary widely about the cost savings to be gained from outsourcing. This research proves that the promise of massive operational savings is unrealistic when you take into account the costs of procurement and ongoing contract management. In our experience, outsourcing arrangements which focus solely on delivering huge savings often fail to meet client expectations. 15 per cent is not only a realistic saving, but also a significant one."
According to the quarterly TPI Index , cost reduction remains the primary motivation in current outsourcing contracts. However, an increasing number of companies are outsourcing primarily in order to improve quality, up from 11% in 2004 to 21% today. Duncan Aitchison said, "Although, clients continue to view outsourcing as a means of achieving cost savings, they are also increasingly concerned with improving the quality of their services. We are seeing an ever-growing number of clients using outsourcing as a way of introducing innovation into their business and the number of TPI-led deals with a 'transformational element' has never been higher."
2006 to date has seen the largest number of outsourcing contracts ever signed in the first quarter of the year. So far this year, 83 contracts have been signed valued at over €18 billion compared with 76 deals valued at just over €13 billion at this point last year. Excluding restructurings, 64 contracts valued at €12.1 billion have been signed so far this year compared with 61 contracts valued at €10.8 billion a year ago.
Duncan Aitchison commented, "This strong quarter is due in part to the rise in the number of contracts being restructured. However, even when we exclude restructurings, the number of contracts signed so far this year is still a first quarter record." IBM, EDS and T-Systems were the main beneficiaries of the contracts let in the first quarter of 2006, winning total contract values of €3.7 billion, €3.6 billion and €1.1 billion respectively. Meanwhile, the pipeline of deals on which TPI is currently advising is led by EDS, IBM and CSC who are competing for deals totalling €6.4 billion, €6 billion and €4 billion respectively.
