Many large organisations that outsourced information technology and other services are bringing some operations back in-house, according to a new study by Deloitte. The organisations that participated in the survey, which focused on the US, currently spend $50 billion on outsourcing and they have found the outsourcing process is much more complex than initially anticipated. Dissatisfaction with cost savings and reduced flexibility were found to be the primary reasons behind participants’ responses.

The study, “Calling a Change in the Outsourcing Market,” reveals that 70 percent of participants have had 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 realising that they could be addressed more successfully and/or at a lower cost internally, while 44 percent did not see cost savings materialising as a result of outsourcing. 

“In the short-term, outsourcing may 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,” says Richard Punt, strategy partner at Deloitte. “However, outsourcing can still deliver value to companies that enter into outsourcing for the right reasons. Large firms need an in-house team trained to manage these deals from inception to execution, and they should look for vendors to match their needs with transparency.”

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 require more management attention than expected.

“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 Punt. , “Outsourcing can put at risk the 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 being more considered in their approach to outsourcing. New outsourcing deals are scrutinised more closely, re-negotiating existing agreements are being re-negotiated, and some functions are being brought back in-house.”

Additional key study findings that illustrate difficulties encountered include:

The Anticipated Level of Value is Not Always Realised:

• 62 percent of participants realised that they require more management effort in comparison to the original estimates.
• 52 percent of participants ranked cost-related issues as the main risks of outsourcing.
• 48 percent of participants indicated that they do not have a standardised methodology to evaluate the business case for outsourcing.

For Outsourcing Vendors, the Paradigm Is Shifting:

• 83 percent of participants said they have renegotiated outsourcing deals due to pricing and to business, technology, and regulatory environment changes.
• 53 percent of participants have moved from long-term contracts (six to ten years) to shorter contracts (up to five years) to increase flexibility and bargaining power.
• 73 percent of the participants are working with multiple vendors to reduce vendor dependency. Participants that had exclusive deals in the past warn that they are very risky, and they will not enter into them again.
• 45 percent of participants are forced to include gain-sharing clauses in vendor contracts as motivation for innovation.

Looking at the UK market, Punt argues that outsourcing remains a growth area. “This study has a global application but the primary focus is on the US – which has moved faster into outsourcing than the UK and the rest of Europe.  Outsourcing remains a valuable business strategy provided the conditions are right.  Both customers and vendors have the opportunity to learn from mistakes made by those who entered into outsourcing early.”

About the Study:
Conducted in person during October – December 2004, the study included responses from senior executives who have both decision-making and operational authority in outsourcing in their organizations.

The participants represent 25 world-class organizations in Manufacturing, Transportation, Consumer Business, Energy, Financial Services, Technology/Media/Telecommunications, Health Care and the Public Sector.

Nearly half of the participants are part of the Fortune 500; one quarter are privately held or public sector entities and four are headquartered outside United States. Six are part of the Fortune 50, and three are ranked in Fortune Global 100.

Approximately three quarters of the participating organisations are listed on the New York Stock Exchange or NASDAQ.

Ten participants are members of the Dow Jones Composite Index and/or the Standard & Poors 500.

These organisations represent a combined market capitalisation of nearly 1 trillion USD, employing over 1 million workers. They spend a combined 50 billion USD on their large outsourcing contracts alone.

The average participant has annual revenues of nearly 50 billion USD, operating expenses of about 13 billion USD, market capitalisation of about 53 billion USD and approximately 60,000 employees.

Two notable academics, Dr. N. Venkatraman (Boston University) and Dr. Eric Clemons (University of Pennsylvania, Wharton School of Business), also participated in the study.

Not all participants answered all study questions.

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP.

Deloitte & Touche LLP is the UK's fastest growing major professional services firm.  The firm is based in 21 UK locations, with over 10,000 staff nationwide and fee income of £1,246 million in 2003/2004. It is a member firm of Deloitte Touche Tohmatsu, a leading professional services organisation, delivering world class audit, tax, consulting and corporate finance services, with around 120,000 people in over 140 countries. Deloitte Touche Tohmatsu is a Swiss Verein, and each of its national practices is a separate and independent legal entity.

Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.

The information contained in this press release is correct at the time of going to press.