That can be the end of outsourcing…

August 9, 2009

Alarming statistics on outsourcing: According to a study undertaken by Compass, outsourcing usually makes both parties unhappy: the vendor and the buyer. Only 25 percent of possible project goals are reached, is the next finding of this study

These figures can also be confirmed by other studies in this area. According to a study by Steria Mummert conducted among German companies, more then 50 percent are unhappy with their outsourcing projects. They are of the opinion that the goals connected with outsourcing have not been achieved or have been only partly achieved. Especially not satisfied were companies representing financial services, public institutions and production companies. In contrast, almost 70 percent of trade companies are satisfied with outsourcing processes to third parties.

One point is very often mentioned in many of the studies: the recognition that the expectations of the buyer differ from those of the vendor, companies underestimate the complexity of outsourcing management and they rather focus on formalities as contracts for instance in place of informal (but very important) aspects as the relation vendor-buyer.

PictureSkyLine That can be the end of outsourcing…

Many companies perceive benefits of outsourcing, however, they tend to use the in-house solution as they fear about losing of control and other risks outsourcing can bring to them.

Is that the end of outsourcing? Definitely not. For outsourcing agreements to be successful, the following best practice measures are recommended:

• Precise definition of outsourcing goals and objectives,

• Measurement of results,

• Clear definition of roles and responsibilities, distinguishing them between the buyer and the vendor,

• One point of contact in the organisation for the vendor,

• Control and continuous improvement in the area of outsourcing transactions, communications and management activities.

Some corporations try to implement an alternative for outsourcing in form of shared services, using the advantages which outsourcing offers and not losing control at once. However, for many corporations the shared services solution is just the first step on the way to outsourcing: they establish a shared service center and then outsource the bundled processes to an external party. Let’s have a short look at two corporations which have made this step: Philips and MAN.

Philips, Dutch group specialized in consumer electronics have decided to outsource their F&A shared services operations located in Poland, India and Thailand to Infosys. About 1,400 employees were affected and the duration of the outsourcing agreement amounted to 7 years.

Just a few weeks ago MAN, German supplier of trucks, buses, diesel engines and turbo machinery, signed a contract with T-Systems and IBM regarding outsourcing their IT and telecommunications infrastructure to them. It is going on outsourcing of networks, data processing centers, decentralized services and PCs. Until now, MAN IT shared service center, named MAN IT Services GmbH, has delivered these services. The employees of MAN IT Services GmbH, amounting to 320 persons, were given the choice: to stay with MAN or to change to the new service provider.

The objective of this decision was to focus on core business and to be served by providers who are more experienced in the IT and telecommunications area than MAN. It is also possible to reduce costs and future risks thank to this measure as the future investments have been transferred to the new business partners.

Magdalena Szarafin


4 Responses to “That can be the end of outsourcing…”

  1. Set measurable goals on August 10th, 2009 12:58 pm

    The main problem I see in companies not satisfied with their outsource vendors is not setting measurable goals for the cost saving. Specifically this is true for large organizations where cost savings may not happen until a year or later. In fact in the beginning they may lose money until the organization and the outsource vendor establishes a project governance team to solve the issues on a timely basis. Often organizations fail to set measurable goals in their outsource project and the management cannot measure if they really saving cost or not.

  2. Mathew on August 10th, 2009 5:39 pm

    Globalization is irreversible, in US it started with Agriculture then Manufacturing and now ITO, BPO, KPO, LPO, etc. I do not know about other countries, but in US, all public companies must increase share-holder’s value by adopting outsourcing low-cost destinations. In fact I just read a report that describes, how patients will be transported to lower-wage countries (medical tourism) for their treatments.

  3. Bob on August 12th, 2009 8:28 pm

    “End of outsourcing” Dream on!!!! But if it happens lot of Americans will get job in US. I wish the US congress can do something about it.

  4. Outsourcing: too risky… too dangerous… too expensive | Outsource Portfolio on September 6th, 2009 6:19 pm

    [...] it from the classical economics teaching us about alternative cost, don’t we?). What about the negative aspects of outsourcing? – They exist as well. Not correct implemented outsourcing projects can bring the opposite effects [...]

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