Although Deloitte’s 2008 outsourcing report found that 89 per cent of outsourcing initiatives are achieving a return on investment of more than 25 per cent, key non-financial benefits are not being realised.

Outsourcing as business transformation

With 64 per cent of executives in the survey citing cost reduction as their primary motive for their largest outsourcing contract, it seems that companies still perceive outsourcing as a tactic to reduce costs. 

The second most important reason was to gain access to technology expertise, cited by 56 per cent of executives. In contrast, other strategic objectives were rated far lower.

Only 37 per cent of executives said a primary driver in their outsourcing decision was to improve customer value, for example, and only 27 per cent said they hoped to gain competitive advantage through outsourcing.

Only after having observed the results, did the respondents recognise that they should have wanted more, with many expressing a high level of dissatisfaction in their outsourcer’s ability to provide any continuous or significant changes in strategy, process or use of technology.

Only 34 per cent reported that they had gained important benefits from their service providers’ innovative ideas or transformation of their operations.

The report Why settle for less? suggests that while outsourcing is still being used in its traditional form, companies and executives aren’t realising all of the potential benefits.

When asked what companies would do differently if they were able to start their outsourcing projects over, 49 per cent of the executives surveyed said they would define service levels that aligned better with their companies’ business goals.

Peter Moller, a partner in Deloitte’s consulting practice, said that the true potential of outsourcing was not being achieved. He added that we are still seeing a focus on a narrow remit of labour arbitrage and cost reduction.

“Overall our survey shows that the emphasis on cost reduction and access to a vendor’s skilled workers reveals a procurement-oriented mind set that takes a narrow view of the potential benefits of an outsourcing relationship. In short, companies are aiming too low,” according to Moller.

Where outsourcing went wrong

Although 70 per cent of respondents stated that they were “satisfied” or “very satisfied” with their outsourcing arrangements – the highest levels in any Deloitte outsourcing study - the survey also revealed significant challenges within the company-outsourcer relationship.

Dissatisfied respondents noted underestimated scope, higher-than-expected costs and poor quality communications, service, and reporting from their service providers.

With a striking 39 per cent of respondents reporting that they had terminated at least one outsourcing contract and transferred it to a different vendor, it seems that vendors and companies are spending extra time and money on their discrepancies over expectations.

In 62 per cent of the cases, these problems escalated to senior management within the first year, with 15 per cent reporting 5 or more such escalations.

The figure rises to 53 per cent that continued to have to escalate in the second year. Fifty per cent of those who reported that they were “dissatisfied” or “very dissatisfied” with their largest contract had brought the function back in-house.

Broader strategic context 

The themes of unrealised potential and lost opportunities echoed throughout the survey results, and these may have been the underlying causes of the escalations and contract terminations that were reported.

The surveyed companies recognised that they should be receiving more than just financial benefits from outsourcing, with less effort and conflict.

Moller said that companies that viewed outsourcing in a broader strategic context, and implemented it systematically could gain advantage over competitors that still take a more procurement-oriented view.

He explained that in an ever more competitive world companies need to take full advantage of every tool at their disposal and that outsourcing is a significant one.

“Transferring a dysfunctional operation to a vendor in the hope of saving costs through economies of scale is simply a case of ‘your mess for less’. Such a strategy can reduce or even eliminate opportunities to reap the significant benefits that outsourcing can provide,” Moller pointed out.

Lack of preparation 

Key challenges facing the outsourcer-company relationship include a lack of communication.

Twenty-nine per cent of the executives saw inconsistent communication between the company and its service provider as a problem, 24 per cent cited problems with reporting, 23 per cent cited the lack of a communications plan, and 20 per cent cited a lack of transparency.

They also cited a lack of preparation/vendor evaluation. Thirty-five per cent of executives, including 55 per cent of executives who were not very satisfied with outsourcing, wished their companies had spent more time on vendor evaluation and selection.

Seventy-five per cent of service providers said that clients are not operationally well prepared for an outsourcing initiative.

The service providers cited a lack of maturity in processes and the inability of many clients to clearly articulate their goals and needs.

Only 37 per cent of executives said that they had developed a business case strategy for an outsourcing strategy.

This was also apparent to their outsourcing provider, with only 6 per cent of outsourcing executives reporting that their clients had a clear outsourcing strategy that was aligned to their business strategy.

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Related links

• Deloitte
• Why settle for less? (full report)