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Outsourcing industry at
crossroads
CHICAGO - Buyers
of outsourcing services in growing numbers are
dissatisfied with offshore service providers,
prematurely terminating contracts and struggling
to harvest the full value of their outsourcing
relationships - even as many of those same
companies plan to increase their level of
outsourcing over the next 12 months, according to
new research by DiamondCluster International, the
global management consulting firm.
According to DiamondCluster International's 2005
Global IT (Information Technology) Outsourcing Study,
the number of buyers prematurely terminating an
outsourcing relationship has doubled to 51%, while
the number of buyers satisfied with their
offshoring providers has plummeted from 79% to
62%. "The blame cannot be heaped solely on the
shoulders of providers," said Tom Weakland, who
leads the outsourcing advisory services practice
at DiamondCluster. "Many buyers are now several
years into at least one outsourcing relationship,
but they still lack effective measures to gauge
the success of their outsourcing initiatives,
which are critical for knowing and getting what
you want."
DiamondCluster's third annual
study was the first in which any buyers reported
that they are planning to reduce their outsourcing
spending. Some 7% will decrease onshore
outsourcing and 5% will do the same with offshore
outsourcing. As for outsourcing's benefits, the
re-allocation of internal resources to more
critical functions was the benefit of outsourcing
buyers most often cited (83%). Cost savings,
generally considered the primary driver of
outsourcing decisions, was only second in the
DiamondCluster study. "This finding underscores
several things we see going on in the market,"
Weakland said. "Companies are learning that the
tremendous cost savings outsourcers have been
promising are actually very difficult to achieve.
And they are learning more about the cost of
losing good people and the value of their
institutional knowledge."
Other key findings from
DiamondCluster's 2005 study of companies that
outsource and the vendors who provide IT
outsourcing services include:
40% of buyers expect to
outsource some IT functions to China over the next
three to five years compared to 8% last year
88% of buyers remain
concerned about employee backlash, but worries
about anti-outsourcing legislation and political
pressure have waned
Buyers report that the greatest risks of
outsourcing include the increased complexity of
managing relationships, reduced operational
effectiveness and lower quality of output from
their outsourcing providers
The 2005
Global IT Outsourcing Report details the findings
of surveys and in-depth discussions with 210
senior IT executives at 1,000 global companies,
and with 242 senior executives at outsourcing
service providers in the United States, India and
other countries. Research was conducted in late
2004 and early 2005.
China the next hot
spot
In 2004, only 6% of survey respondents
said they planned to establish offshore operations
in China. Today, that number has soared to 40%.
"China is starting to look like India did 10 years
ago," Weakland said. "As outsourcing capability in
China takes off, it will put deflationary pressure
on the traditional providers of commoditized
outsourcing services and set an entirely new price
point. The most aggressive providers are
establishing operations in China now to grab
market share. Taking a wait-and-see approach is
not an option."
Countries that appear to
have fallen out of favor, according to the data,
are Israel and Russia.
'Face of
outsourcing' out of sight
While worries
about anti-outsourcing legislation and political
pressure have dropped dramatically from 85% to
50%, concerns about backlash from employees,
customers and the public persists. Some 88% of
buyers remain concerned about employee reactions
to outsourcing, 67% fret about employee severance
costs, 66% about customer reaction and 65% about
negative publicity. Sensitive to buyers' concerns,
providers limit their onsite presence to keep the
"face of outsourcing" out of sight from employees,
according to the study.
"Interestingly,
buyers are not overly worried about the impact of
competitor criticism or union pressures on their
outsourcing endeavors," said DiamondCluster's
Weakland. "We feel that this shifting mindset
shows outsourcing has become integral to today's
business strategy."
Despite war, terrorism
and mounting tensions in the Middle East, buyer
perceptions of global stability have improved. In
2004, 78% of buyers said concerns about global
stability were impacting their outsourcing
decisions, but today that number has dropped to
68%. Larger world conflicts are concentrated in
regions not typically known for outsourcing and
concerns about reactions at home are taking
precedence, according to Weakland.
Getting smart on pricing
Buyers
offered conflicting viewpoints on pricing of
providers. While the majority believes rates have
remained consistent, 25% believe they have
increased and 22% believe they have declined.
"Providers have worked hard to remove cost as a
key differentiator and it appears to be working,"
said Weakland. "Traditional industry pricing
benchmarks are becoming less reliable as an
indicator, therefore, buyers must be willing to
balance costs and value when negotiating price."
Summing up the major findings of the
DiamondCluster 2005 Outsourcing Study, Weakland
said: "The organizations we studied make it clear
that outsourcing is here to stay, but they are
still struggling to execute an optimal sourcing
strategy. One-off, transactional outsourcing deals
haven't yielded the expected results. The future
of outsourcing depends on the ability of buyers to
think about sourcing IT talent strategically and
in using the appropriate metrics to confirm that
they are deploying the right resources - internal
or external - for the right functions," said
Weakland. "In turn, it will be up to providers to
meet and exceed buyer expectations, or risk losing
important contracts."
(Asia
Pulse) |
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