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Study Finds Outsourcing Delivers ROI, But Not Innovation

Those dissatisfied with outsourcing deals cited high costs, poor communications, and underestimating the project's scope.
Too many businesses take a short-sighted view of their outsourcing contracts, concludes Deloitte following a recent study.

The consulting firm found that while most business executives it surveyed are satisfied with the cost savings they get from outsourcing, most said outsourcing relationships had not led to important innovations or transformations.

Of the 300 business and IT executives involved in outsourcing deals surveyed by Deloitte, 70% said they were satisfied with their relationships, and 83% said outsourcing projects had met their return-on-investment goals, with an ROI averaging just above 25%. But only one in three executives surveyed said they had gained important benefits from innovative ideas or transformation of their operations.

The survey also found that businesses frequently suffer bad outsourcing relationships before finding the right one. Thirty-nine percent of respondents said they terminated at least one outsourcing contract and transferred it to a different vendor in their careers. Among those who reported dissatisfaction with a large contract, half brought the function back in-house. Nearly two out of three of the executives dissatisfied with a large contract said the problems were escalated to senior management within the contract's first year, with half continuing to get senior management involved in the second year.

Additionally, more than one in three executives said they wished their companies had spent more time on vendor evaluation and selection. One-half of respondents said that if they could go back and do something differently, they would define service levels that aligned better with their companies' business goals at the beginning of the project.

Among those who said they were dissatisfied with their outsourcing relationships, common reasons included underestimating the project's scope, higher-than-expected costs, and poor-quality communications, service, and reporting from their service providers.

"The themes of unrealized potential and lost opportunities echoed throughout the survey results, and we believe these may have been the underlying causes of the escalations and contract terminations that were reported," Deloitte said in its report. "The surveyed companies recognized that they should be receiving more than just financial benefits from outsourcing and that they should be receiving them with less effort and conflict."

Deloitte said "lost opportunities" may be the result of companies setting their outsourcing goals too low -- as a method to reduce costs rather than drive transformation that would improve efficiency, productivity, and reliability. "Then, only after having observed the results, did they recognize that they should have wanted more," according to the report.

Deloitte also surveyed 31 service provider executives, who suggested that companies may not be positioned to realize the full benefits of outsourcing. Service providers said clients are often unprepared, don't have a solid outsourcing plan, and don't have the operational data needed to make sound outsourcing decisions.

Deloitte concluded from the study that companies that view outsourcing strategically, and implement it systematically, can gain a competitive edge over those that "remain stuck in a traditional procurement mind-set."