Human Resource Management

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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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Human Resource Management

Human Resource Management, 4th edition
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