Study: Outsourcing losing luster

While organizations turned to outsourcing during tough economic times to cut costs and boost efficiencies, a study by Deloitte Consulting has found that few organizations have realized the benefits they expected and some are bringing outsourced projects back in-house.

The survey of 25 large organizations with a combined $50 billion in outsourcing contracts found that 70% have had negative experiences with outsourcing projects and are now taking a more cautious approach. One in four companies has brought outsourced functions back in-house and nearly half have failed to see the cost savings they anticipated as a result of outsourcing.

The study, titled "Calling a Change in the Outsourcing Model" and released last week, concludes that companies will need to alter their approach to outsourcing as the economy expands. While cost savings will remain important, companies need to look at outsourcing more strategically to determine when handing off IT projects makes sense, says Ken Landis, a senior strategy principal at Deloitte.

"When revenues were down [outsourcing] made a lot of sense and it was a perfect tool for publicly held companies to manage their earnings," Landis says. "But in a growth environment, the questions of complexity and friction, the difficulty in relating cultures between two firms and a lot of other questions come to the fore."

"Cost is still absolutely critical, but firms tend to switch from being cost-focused to growth-focused as the economy grows," he says. "What they're finding is that in growth mode outsourcing makes them arthritic, slow to respond."

Companies originally looked to outsourcing to reduce costs, increase flexibility and simplify operations, but the reality has been that outsourcing has added a layer of complexity that has resulted in unexpected costs and management needs, the study says. Indeed, 62% of the companies surveyed said there was a larger management drain than expected as a result of outsourcing, and more than half said they couldn't free up internal resources for other projects as they had hoped.

"Outsourcing is now a question of business strategy; it's not a cost-reduction question," Landis says. "I'm not saying that outsourcing is going away, but firms need to be more conservative in their approach to outsourcing."

The study suggests five new outsourcing models that are more strategically focused, including using outsourcers for short-term help when transforming an IT function, sending only commodity projects to outsourcers and using outsourcers to spread out risk for areas such as disaster recovery.

"Outsourcing as we know it will increasingly lose luster," the report concludes. "Vendors and organizations will become more selective about the deals they pursue."

This story, "Study: Outsourcing losing luster" was originally published by Network World.

Copyright © 2005 IDG Communications, Inc.

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