Is Outsourcing Reaching Its Limits Or Simply Pausing For Breath? – Part II

In my last column, I reviewed some of the key findings of a study conducted by Deloitte Consulting of the experiences of 25 of the largest practitioners of outsourcing in the world. In this article, I discuss the findings from another study conducted by the consulting firm DiamondCluster of over 400 buyers and providers of IT outsourcing services. The complete report can be downloaded at:
http://www.diamondcluster.com/press/PressRelease.asp?src=pressreleases331.asp.

This is the third consecutive year that DiamondCluster has polled companies about their IT outsourcing experiences. The results of their latest survey were released in June 2005. Like the Deloitte study, the findings from this survey present an intriguing snapshot of outsourcing practices and experiences that shed welcome light on some of the popular beliefs and thinking about this latest business mega-trend. The DiamondCluster report suggests that overall IT outsourcing activity is robust and seems poised to continue apace for the foreseeable future. But a closer look at the benefits and costs of IT outsourcing provides insights that challenge some conventional wisdom about this pervasive practice.

Take offshore outsourcing for example. It has aroused enormous passion among workers, stirred up much controversy in the media and engendered a great deal of criticism of top managers of corporations. The practice even emerged as a political issue in last year’s presidential election and was addressed in numerous state legislatures - a number of which passed laws to limit its growth, at least in the public sector.

The lead headline of DiamondCluster’s study is that “growing numbers of companies are dissatisfied with offshore outsourcing providers.” The percentage of companies dissatisfied rose from 21% last year to 38% this year. And for the first time since the survey was started in 2002, a small number of respondents (7%) indicated that they would decrease their level of offshore outsourcing.

Before you think about writing obituaries for offshore outsourcing, read on. The report also suggests that this silver cloud has a dark lining. It attributes the main cause of increased unhappiness to the explosion of demand for offshore services. Apparently so many companies are sending work offshore that the providers simply have not been able to keep up with the demand and thus service and quality have suffered. Overblown expectations may be a contributing factor as well – providers said that one of their greatest concerns is meeting unrealistic or immeasurable buyer expectations. Despite these difficulties, 70% of respondents indicated they intend to increase their levels of offshore outsourcing over the next twelve months, up from 32% in 2002. And forty percent of respondents indicated they expect to outsource some IT functions to China in the next 3-5 years.

So offshore outsourcing presents a paradox - overall growth is expected to continue even though the number of problems and level of dissatisfaction with this practice are forecast to increase as well. I guess all the companies planning on sending IT work and jobs overseas feel that the potential benefits to be gained outweigh the risks. Or perhaps they think they are smart enough to avoid the problems and pitfalls that a growing number of companies are expected to encounter.

Other key findings of the DiamondCluster study also present a mixed picture of outsourcing experiences. The number of buyers that have ‘abnormally terminated’ an outsourcing relationship soared to 51% from 21% last year. The primary reasons for these mass terminations were poor provider performance (36%), a change in strategic direction of the buyer (16%), deciding to move the function in-house (11%), and not achieving cost savings (7%).

But once again, opponents of outsourcing shouldn’t get too excited by these findings. Despite this growth in contract terminations, 81% of respondents indicated that they were still satisfied with onshore outsourcing, up from 74% last year.

The Deloitte study reported great disappointment over the level of cost savings actually achieved through outsourcing. The DiamondCluster study shows similar results. It found that the benefits of reallocating resources freed up by outsourcing IT overwhelmingly trumps the amount of cost savings that companies have actually been able to realize through this practice. Less than 50% of respondents say outsourcing either exceeded (9%) or met (37%) their expectations regarding cost reduction. But, 83% of respondents cited re-allocation of internal resources to more critical functions as the main benefit of outsourcing.

Risk is a critical issue for IT outsourcing. The top three risk factors associated with it were increased management complexity, reduced operational effectiveness and lower quality of output. And employee backlash remains a big concern for 88% of the outsourcing buyers polled.

The bottom line take away of the DiamondCluster study is that IT outsourcing will continue to grow despite all the hiccups (or chronic indigestion depending on your point of view) associated with this practice. The good news is that companies seem to be learning something from their experiences. They are getting smarter about what, why and how they outsource and are more realistic about the benefits they expect and the challenges they must overcome if they are to achieve their goals.

These conclusions about IT outsourcing will of course provide little comfort to the legions of IT workers across the country hoping their job isn’t the next one to get a one-way ticket overseas. If you are one of them, take heart. There are several things you can do to avoid being put out on the street as a result of the growth in outsourcing activities that companies indicate they intend to continue. Work to ensure your skills are not generic. Take time to learn about the business. Take a user to lunch. Make some customer visits with the sales force. Take calls in the customer care center. Visit the distribution center. Have a stroll around the factory floor. The more you know about how your company uses IT, and what it needs to do to get more value from it, the better off you’ll be. Learn to speak the language of the business. Appreciate the problems that your co-workers in other departments face and how IT can solve them or make them worse.

Doing these things will not only diminish the chances of your job being outsourced in the first place, it will also help you become one of the critical resources that so many companies in these studies say they intend to redeploy to more critical activities as a result of outsourcing.