Upfront: Rethinking Outsourcing

Business publications are chock full of stories about the growth of outsourcing and the many benefits companies are reaping from sending a wide array of business processes and IT infrastructure out the door. But 70 percent of respondents to a recent poll by Deloitte Consulting LLP had significant negative experiences with outsourcing projects, and 25 percent have reduced outsourcing activities. Dissatisfaction in areas that outsourcing was expected to improve, such as costs and complexity, was found to be the primary reason behind participants' negative responses.

One in four participants recalled outsourced functions after realizing that they could be handled more successfully and/or at a lower cost internally, while 44 percent did not see cost savings materialize as a result of outsourcing. In addition, 57 percent of participants absorbed extra costs for services they believed were included in the contracts with vendors. Nearly half of the study participants identify hidden costs as the most common problem.

"There are fundamental differences between product outsourcing and the outsourcing of service functions, differences that were overlooked but have now come to the fore," says Ken Landis, a senior strategy principal at Deloitte in New York City. "Outsourcing vendors and companies may have conflicting objectives, putting at risk clients' desire for innovation, cost savings and quality. Moreover, the structural advantages envisioned do not always translate into cheaper, better or faster services. As a result, larger companies are scrutinizing new outsourcing deals more closely, renegotiating existing agreements and bringing functions back in-house with increasing frequency."

The blame for outsourcing failure can't be laid at the feet of external providers exclusively, however. Businesses must shoulder part of the blame themselves. Sixty-two percent of respondents underestimated the management efforts their initiative would require; 57 percent say they could not free up internal resources for other projects, leading to larger than anticipated deal-management overhead. And 48 percent indicate that they lacked a standardized methodology to evaluate the business case for outsourcing.