Outsourcing still driven by cost reduction promise
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But contracts are often more expensive than expected.
Cost reduction continues to be the main motivation behind outsourcing, although the actual net savings tend to be lower than the claims made by the services providers. Once the costs of procurement and contract management are factored out, average savings are around 15%; the range of reductions, 10% to 39%, is still far short of common claims of up to 60% savings.
The study, by outsourcing contracts by TPI, a sourcing advisory company, found that more organisations are hoping to improve the quality of the businesses services they deliver. While 11% in 2004 saw outsourcing as a mechanism for quality enhancement, that figure had risen to 21% in the first quarter of 2006.
This increase has coincided with the largest ever number of large outsourcing contracts signed in the first quarter of a year. To the end of March, 83 contracts – worth over e18 billion – were awarded, compared to 76 deals – worth s13 billion – in the first quarter of 2005.
TPI’s managing director, Duncan Aitchison, says: “Outsourcing arrangements which focus solely on delivering huge savings often fail to meet client expectations – 15% is not only a realistic saving, but also a significant one.”
Nearly a quarter of the deals done this year have involved the restructuring of existing deals. This corresponds to a third of the total value of deals, whereas historically restructuring accounted for 15% of contracts. TPI expects another 141 restructurings in the rest of the year, two thirds as a result of first-generation contracts coming to the end of their term. On average, 79% of customers retain their incumbent service provider when contracts come up for renewal.
