Outsourcing Saves 15%
April 15 2006 - Claims of 60% savings through outsourcing are massively
exaggerated according to a study by TPI, a leading sourcing advisory firm.
TPI's study examined outsourcing contracts awarded between 2003 and 2005 and
found that savings net of severance pay, professional fees and governance costs averaged 15%. The savings
ranged between 39% at the top end and 10% at the bottom. 15% was also
the average level of savings anticipated when contracts were first let.
According to Duncan Aitchison, Managing Director of TPI:
"Opinions vary widely about the cost savings to be gained from
outsourcing. This 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. 15% is not only a realistic saving,
but also a significant one."
Cost is the main driver
Cost reduction is still the primary motivation for current outsourcing
contracts but the number of businesses outsourcing primarily in order to improve quality,
has risen from 11% in 2004 to 21% in the recent study.
Duncan Aitchison said:
"Although, clients continue to view outsourcing as a means of achieving
cost savings, they are also increasingly concerned with improving the quality of their
services. We are seeing an ever-growing number of clients using outsourcing as a way of
introducing innovation into their business and the number of TPI-led deals with a
‘transformational element' has never been higher."
Strongest first quarter ever
The first quarter of 2006 saw the largest ever number of
outsourcing contracts for a first quarter with 83 signed contracts at a value of over
€18 billion. This compares with 76 deals valued at just over €13 billion at the same point in
2005.
Duncan Aitchison added:
"This strong quarter is due in part to the rise in the number of
contracts being restructured. However, even when we exclude restructurings, the number
of contract signed so far this year is still a first quarter record."
IBM (€3.7 billion), EDS (€3.6 billion) and T-Systems (€1.1
billion) were the chief beneficiaries of these contracts. TPI is currently advising on deals
being competed for by EDS (€6.4 billion), IBM (€6 billion) and CSC
(€4 billion).
A third (19) of the total value of contracts signed so far this year were
restructuring contracts totalling €6 billion. This compares with a historical
average of 15%. A further 141 contracts totalling
almost €33 billion appear to be due for restructuring later in 2006. TPI research shows
that two-thirds (66%) of restructurings were due to the
first generation of contracts coming to the end of their term, rather
than any complaint with the providers. In fact, most (86%) incumbent providers were retained
when contracts were restructured, although percentage retained has fallen from 86% in
2004.
According to Duncan Aitchison:
"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. 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."
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