Hidden fees like government costs and severance pay are limiting the cost benefits of IT outsourcing, though the business practice isn't losing its popularity.
Posted Apr 14, 2006
The outsourcing of IT and business services is only delivering cost savings of 15 percent, according to the latest study from outsourcing advisory firm TPI. This statistic disproves general market claims that outsourcing can reduce costs by more than 60 percent, and reveals that more companies are outsourcing to improve service, rather than save money.
According to the "TPI Index," a quarterly report on the state of the global outsourcing industry, after professional fees, severance pay, and governance costs, outsourcing savings range between 10 and 39 percent, with the mean being 15 percent. "The research proves that the promise of massive operational savings is unrealistic when you take into account the costs of procurement and ongoing contract management," says Duncan Aitchison, TPI's managing director. "In our experience outsourcing arrangements that focus solely on delivering huge savings often fail to meet client expectations."
TPI found that cost reduction remains the primary motivation behind current outsourcing contracts, but an increasing number of companies are now beginning to outsource to improve quality, as opposed to saving money. Twenty-one percent of those companies surveyed now outsource to improve quality, as opposed to just 11 percent in 2004.
Despite reduced cost savings and a continuing trend to outsource to improve service quality, outsourcing is not declining in popularity. TPI found that the first three months of 2006 had the largest number of outsourcing contracts ever signed in the first quarter of a year. Eighty-three contracts were signed, valued globally at over 18 billion euros ($21.9 billion), compared with 76 deals worth just over 13 billion euros over the same period last year. IBM, EDS, and T-Systems were the main beneficiaries of these new contracts, winning a total of 3.7 billion euros, 3.6 billion euros, and 1.1 billion euros, respectively. While the majority of EDS's contracts were specifically customer service related, the majority of IBM's and T-Systems' focused more on general IT and BPO outsourcing deals.
BPO also experienced a distinct increase in the first quarter of 2006. A total of 49 BPO deals were signed, a 63 percent increase over last year, marking an all-time high for BPO contracts signed in a single quarter. American firms signed approximately two-thirds of all BPO contracts in the marketplace this first quarter, led predominantly by the financial services industry, which accounted for more than 30 percent of total BPO contracts, and 46 percent of the total value signed.
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