New York, April 19, 2005 — Many of the world's largest organizations that were quick to participate in information technology and business process outsourcing are bringing operations back in-house and exploring alternatives, according to a new Study released today by Deloitte Consulting LLP, an associated partnership of Deloitte & Touche USA LLP. Ironically, dissatisfaction in areas that traditional outsourcing was expected to improve, such as costs and complexity, was found to be the primary reason behind participants' negative responses.

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 study participants identified hidden costs as the most common problem when managing outsourcing projects.

"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 Ken Landis, a senior strategy principal at Deloitte. "Outsourcing vendors and companies may have conflicting objectives, putting at risk clients’ 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 scrutinizing new outsourcing deals more closely, re-negotiating existing agreements, and bringing functions back in-house with increasing frequency."

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.

Additional compelling, key study findings that illustrate pitfalls encountered include:

The anticipated level of value is not always realized:

• 62 percent of participants realized that they require more management efforts in comparison to the original estimates;
• 57 percent of participants said they could not free up internal resources for other projects, leading to larger than anticipated deal management overhead;
• 52 percent of participants ranked cost-related issues as the main risks of outsourcing;
• 81 percent of participants have limited or no transparency to a vendor’s pricing and cost structure, resulting in increased chances of paying additional costs;
• 48 percent of participants indicated that they do not have a standardized 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 10 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, highlighting continuing concern about vendor complacency.

"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," says Landis. "However, outsourcing can still deliver value to companies that enter into outsourcing for the right reasons using a right model such as centralize-standardize-outsource, transform-operate-transfer, commodities outsourcing, risk transfer, and shifting fixed costs to variable, and have superb talent in-house to manage these deals from inception to execution."

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

• 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 have headquarters outside the United States. Six are part of the Fortune 50, and three are ranked in Fortune Global 100.
• Approximately three quarters of the participating organizations are listed on the New York Stock Exchange or NASDAQ.
• Ten participants are members of the Dow Jones Composite Index or the Standard & Poors 500. These organizations represent a combined market capitalization of nearly US$1 trillion and employ more than 1 million workers. They spend a combined $50 billion on their large outsourcing contracts alone.
• The average participant has annual revenues of nearly $50 billion, operating expenses of about $13 billion, market capitalization of about $53 billion 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
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. Deloitte Touche Tohmatsu is an organization of member firms around the world devoted to excellence in providing professional services and advice, focused on client service through a global strategy executed locally in nearly 150 countries. With access to the deep intellectual capital of 120,000 people worldwide, Deloitte delivers services in four professional areas — audit, tax, consulting, and financial advisory services — and serves more than one-half of the world’s largest companies, as well as large national enterprises, public institutions, locally important clients and successful, fast-growing global growth companies. Services are not provided by the Deloitte Touche Tohmatsu Verein, and, for regulatory and other reasons, certain member firms do not provide services in all four professional areas.

As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other’s acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names "Deloitte," "Deloitte & Touche," "Deloitte Touche Tohmatsu" or other related names.