Is the bloom coming off the outsourc- service providers don’t outsource as ing rose? extensively as companies in the health A couple of recent surveys suggest care, insurance and financial services the rush to outsource information industries, the trend likely holds true technology may be slowing, and that among logistics companies. the deals still going through are Additional research suggests the struc-changing form. ture of outsourcing contracts is changing.
“When it comes to outsourcing, when Technology Partners International, a you’ve gotten the low-hanging fruit, the company that tracks overall outsourcing only thing you can do is start thinking strategically,” said Tom Weakland, managing partner of the global sourcing practice at management consulting firm DiamondCluster International.
Outsourcing non-core competencies has been a cardinal principle of business management for at least two decades, and the logistics department is a key target of outsourcing initiatives. Overall outsourc- deals of $50 million and up, said 2006 ing revenue and employment grew 15 revenue won’t reach the $75 billion level percent in 2005, according to the Interna- it hit in 2005. tional Association of Outsourcing Profes- “Contract bookings expressed in dollar sionals. The average outsourcing compa- awards is what we’re seeing declining,” ny employed 10,000 people at facilities in said Peter Allen, partner and managing eight countries. director for market development at TPI.
However, DiamondCluster’s annual IT As of July, the company cataloged 92 outsourcing study indicates enthusiasm deals compared with 58 by this time last for the practice may be cooling, at least in year. But deals of $500 million and above some areas. While a majority of 153 buyers have declined, Allen said. Average con-surveyed said they intended to increase tract duration has shrunk to 5. 5 years purchasing of outsourced IT services (64 from about seven years in 2000, while the percent of those who send work out of biggest contracts have shortened to about their country, 50 percent of those who 7. 2 years from 8. 5 in the recent past.
send work elsewhere in their country), Shorter contracts are especially com-that’s down from 74 percent of all out- mon for IT services, which is where the sourcing clients polled last year.
About 8 percent of those who send work out of their home country and 9 percent of those who send it elsewhere in their country plan to decrease their use of outsourced IT this year; two years ago, no one had such plans.
Weakland noted the surveys cover all IT outsourcing, though some transportation and logistics companies were surveyed. He said although supply chain
Offshore Outsourcing
Companies are less satisfied with results
80%
70%
60%
50%
40%
30%
20%
10%
0%
Satisfied Unsatisfied Neutral
Source: DiamondCluster International
’04 ’05 06
bulk of the industry’s dollar volume is made, Allen said. “Outsourcing is not falling out of favor at all,” he said. “It’s just the strategy of how long those contracts are awarded for has changed.”
Allen said there are more outsourcing providers, and services are pretty standardized. There’s no loss of cost savings when services are standardized so there’s minimal cost in switching between commodity service vendors.
Some vendors are competing on price more than service. “It’s like if you were contracting for snow removal for two years instead of 10 years,” he said. “If
there’s no material benefit to not switching, why wouldn’t you do so?”
Weakland said companies are reassessing their IT outsourcing in light of recent financial results. Many are no longer seeing (if they ever did) 40-plus percent savings from outsourced functions or departments. Some mistakenly outsourced departments or functions that turned out to be core competencies. Providers may have over-promised or under-delivered on results. And some buyers underestimated the complexity of organizing, measuring and maintaining outsourced business relationships.
Weakland said outsourcing isn’t going away. Transportation logistics has also been slower and slightly behind the IT outsourcing curve, so there are lots of legacy systems and opportunities for expansion.
“I wouldn’t be surprised to see that change as everybody becomes more aware of strategic outsourcing,” said Weakland, describing that as a more dynamic approach to the organization that better identifies where cost savings will be most prolific.
BY WILLIAM HOFFMAN
References:
Archives