Businesses not reaping potential of outsourcing

15 Feb 2008

Enterprises entering into outsourcing arrangements are focusing too heavily on reducing costs through labour arbitrage alone, resulting in high levels of disappointment and conflict, even though most companies are realising the cost savings they had hoped for.

According to a new study by Deloitte entitled ‘Why Settle for Less’, 83pc of companies which embarked on an outsourcing strategy achieved a return on investment of over 25pc.

However, 49pc of the executives surveyed indicated they would have defined service levels that aligned better with their company’s business goals if they could start their outsourcing projects over and only 34pc said they had gained important benefits from their service provider’s innovative ideas or transformation of their operations.

In addition, by a 3-to-1 margin, the outsourcing service providers polled reported that their client companies did not have a solid outsourcing plan, lacked the operational data needed to make sound decisions and did not understand how the to-be organisation would really work.

Such contradictory findings could be the result of a failure to properly define the goals of the outsourcing projects beyond just a money-saving exercise.

“Outsourcing is working financially for a majority of companies in this survey. However, executives’ propensity to lead with cost reduction and labour arbitrage without emphasising the need for overall optimisation stymies their company’s chance to realise the full benefits of outsourcing,” said Peter Lowes, a principal with Deloitte Consulting and the leader of its outsourcing advisory services group.

“The themes of unrealised potential and lost opportunities in using outsourcing as an opportunity to innovate echo throughout this report,” added Lowes.

He noted these lost opportunities may also be the result of the companies setting their outsourcing goals too low.

Lowes said companies may have initially perceived outsourcing primarily as a tactic to reduce costs, as opposed to a means to fundamentally transform their operations and drive dramatic improvements in efficiency, productivity and reliability.

By John Kennedy