Down To Business: Outsourcing Customers Send Mixed Signals

KPMG International last week released the results of a survey it conducted on global outsourcing, prompting various pundits to conclude that the industry and customer relationships are stronger than ever.

Among the high points: 42% of customers surveyed think their outsourcing contracts have "definitely improved" their financial performance; 47% think their service providers brought to their business experience that they previously didn't have; and 62% take exception to the conventional wisdom that "as many as half of sourcing deals fail." Perhaps the most positive finding: 89% of the customer organizations surveyed say they plan to maintain or increase their current level of outsourcing.

On the whole, KPMG's 34-page "Strategic Evolution" report is balanced, especially for a vested global services interest such as itself. KPMG surveyed C-level and other execs at 650 organizations in 32 countries, 80% of them involved in IT outsourcing and most of the rest involved in business process outsourcing.

A critical eye, however, finds a dark side to many of the trends presented in the report and parroted by the punditry as positive. Let's start with KPMG's attempt to debunk the myth that half of outsourcing deals fail. While 62% of customer respondents to the survey consider this statement a "gross or mostly an oversimplification," 25% say it's "not an oversimplification but not entirely appropriate" and 13% say it's "mostly or an entirely appropriate view." It's hardly a ringing endorsement when 38% of outsourcing customers think that, to some degree, up to half of these contracts flop.

Meantime, if 47% of customers think their service providers impart experience that they previously didn't have, then it stands to reason that the other 53% think their outsourcers impart little to no such experience. From my conversations with various IT executives, this is their No. 1 concern with outsourcing: Suppliers, for all their technical smarts, just don't understand the businesses of their customers.

It's the main reason Sprint Nextel's Richard LeFave nixed a long-term outsourcing contract with IBM--pulling back "full application ownership, including full life cycle management, architecture, system analysis, and design"--when he took over as CIO of the merged telecom company last year. And it's why Jamie Dimon did the same thing a little over a year ago when he became CEO of JPMorgan Chase. Dimon has said that the banking giant is as much a technology company as General Motors is a manufacturing company. No outsourcing supplier can know its core business better.

KPMG also found that 42% of the customer organizations it surveyed think their outsourcing contracts have definitely improved their financial performance, but only 27% think they have definitely improved their competitiveness. If outsourcing suppliers aren't doing one or the other for their customers, they're not doing much.

Part of the ambiguity with these responses goes to another survey finding: 72% of customers say they don't have, or don't share with their service providers, criteria for measuring the success or failure of their outsourcing engagements. "Success is ill-defined," KPMG quotes the CEO of one manufacturer. "Measurement of business benefits is difficult, and there is a tendency not to measure."

Clearly, customers are still finding their footing. Last year revealed a trend toward shorter, smaller, and more specialized outsourcing contracts, producing a record number of total deals, according to advisory firm TPI. However, the fourth quarter of 2006 was the worst fourth quarter in five years when it comes to the overall value of brand-new outsourcing deals. For the year, "total contract value" declined 8% compared with 2005, to $78 billion, TPI reports.

As much as $100 billion of outsourcing contracts are due for renewal this year. We'll see how strong these relationships really are.

Rob Preston,
VP/Editor In Chief
[email protected]

To find out more about Rob Preston, please visit his page.