Savings require close review

Staff -- Purchasing, 5/18/2006

The next time you're in a meeting discussing forecasted savings on an outsourcing project, ask this question: "Is that figure before or after professional fees, severance pay and governance costs?"

It could change the whole discussion.

According to a recent survey, the average savings from outsourcing contracts awarded between 2003 and 2005 after calculating professional fees, severance pay and governance costs were only 15%—not the 60% that many outsourcing providers may be touting.

According to Duncan Aitchison, managing director for international operations at research firm TPI, the company's research "proves that the promise of massive operational savings is unrealistic when you take into account the costs of procurement and ongoing contract management. In our experience, outsourcing arrangements which focus solely on delivering huge savings often fail to meet client expectations."

TPI's research found "true cost savings" delivered by outsourcing range, he says, between 10% at the bottom end and 39% at the top.

While cost reduction remains the primary motivation in current outsourcing contracts, there are other motivators. This year, 21% of companies say they are outsourcing primarily in order to improve quality, up from 11% in 2004.

"We also are seeing an ever-growing number of clients using outsourcing as a way of introducing innovation into their business," he says.

The TPI study found that companies are shopping around more for outsourcing partners.

"Although historically, most outsourcing restructurings have been renegotiated with the incumbent service provider, it can no longer be taken as read that the existing provider will retain all or even part of the original deal through a restructuring," Aitchison comments. "Client retention will increasingly depend on an incumbent's ability to offer a competitive proposition for every facet of the service and this will often require significant changes in price, contractual terms, scope and delivery approach from the original agreement."

Read Purchasing's exclusive series "Outsourcing lands in procurement" now on www.purchasing.com.