Providers and users alike admit to thorny outsourcing results
By Staff -- Manufacturing Business Technology, 12/1/2005 12:00:00 AM
The IT outsourcing market is maturing, but with its growth comes dissatisfaction on the part of many.
Poor performance scores are reflected in the doubling of the number of companies that have prematurely terminated outsourcing relationships—now above 50 percent, according to a survey released by Chicago-based DiamondCluster International. Although more respondents say they intend to increase outsourcing, they're going to do so at a slower pace than in previous years. And for the first time ever, some say they will decrease outsourcing efforts.
"Every year we ask buyers how many relationships they have abnormally terminated in the last 12 months. In 2004, it [amounted to] 21 percent [of agreements], which we thought was a big number," says Tom Weakland, managing partner for DiamondCluster. "In 2005, that number jumped to 51 percent."
Weakland says even providers admit to problems at a higher rate, citing the number of global outsourcing companies willing to acknowledge they've seen contracts prematurely terminated jump from 7 percent in 2004 to 49 percent in 2005.
Satisfaction with onshore outsourcing topped that for offshore for the first time—climbing from 74 percent a year ago to 81 percent in 2005—while satisfaction with offshore outsourcing dropped from 79 percent to 62 percent in the same period.
"The [primary issue cited by] respondents is that outsourcing is harder than you expect it to be. It requires more planning," Weakland says.
The survey's value can be seen in this single insight.
"A lot of people jumped into outsourcing without thinking it through, without being strategic about it," maintains Weakland. As a result, he says, they sourced too many providers in the mix, which compounded the challenge of successfully managing relationships while forfeiting economies of scale. With cost cutting a major driver, many have found cost savings hard to measure and achieve.
"The right way to look at outsourcing is to view it as a management tool. If it is used effectively in the right situation, it can be good," Weakland continues. "If used in the wrong situations, it can be very bad."
On the provider side, explosive growth in outsourcing over the last decade—only 20 percent of respondents outsourced any IT functions prior to 1996, where today virtually 100 percent do—resulted in accelerated staff turnover among providers. This made it increasingly difficult to retain quality workers, resulting in a higher number of less-qualified shops.
"The primary issue for buyers is how to better manage relationships, expectations, and performance," Weakland says. "For providers, they need to stop talking about wage arbitrage and cost differences, and show that they understand their customers' businesses—emphasizing that they bring value and solutions to the relationship. The ones that can do that will have the most success."
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