Top guns reduce outsourcing, says study

NEW DELHI: Hidden costs, added complexity have prompted 25 percent of participants to reduce outsourcing activities, according to a new study released by Deloitte Consulting LLP. Many of the world's largest organizations that were quick to participate in IT and BPO are bringing operations back in-house and exploring alternatives.






"There are fundamental differences between product outsourcing and the outsourcing of service functions, differences that were overlooked but have now come to the fore," said a senior strategy principal at Deloitte Ken Landis.





The study, "Calling a Change in the Outsourcing Market," reveals that 70 percent of participants have had significant negative experiences with outsourcing projects and are now exercising greater caution in approaching outsourcing. One in four participants have brought functions back in-house after realizing that they could be addressed more successfully and/or at a lower cost internally, while 44 percent did not see cost savings materializing as a result of outsourcing.





Moreover, 57 percent of participants absorbed costs for services they believed were included in the contracts with vendors. Nearly half of the participants in the study identified hidden costs as the most common problem when managing outsourcing projects.





According to the study, participants originally engaged in outsourcing activities for a variety of reasons: cost savings, ease of execution, flexibility, and lack of in-house capability. However, instead of simplifying operations, many companies have found that outsourcing activities can introduce unexpected complexity, add cost and friction into the value chain, and require more senior management attention and deeper management skills than anticipated.





"In the near term, outsourcing will become less appealing for large companies because it is not delivering the value as promised, and its appeal as a cost-savings strategy will also diminish as the economy recovers from recession and companies look for differentiated solutions to support their growth," said Landis.