Don't Give Up on Outsourcing

Sure, customers complain about outsourcing's costs and complexity, but companies have been falling into and out of love with the practice for more than a decade.

May 6, 2005

2 Min Read
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Project Problems

Why the disillusionment? Nearly half of the 25 blue-chip company executives interviewed by Deloitte identified "hidden costs" as the most common problem when managing an outsourcing project. Among other problems: Outsourcers often fail to understand customers' business challenges and respond fast enough to their changing needs; and many customers find that managing the relationship can be just as complicated as running an IT shop.

Sometimes these relationships unravel over time. In a typical case, the customer negotiates a long-term contract with the outsourcer, which throws personnel at the engagement, but the number of bodies never increases because there's no incentive for the vendor. Before the contract matures, the customer's needs have grown tremendously, so the prickly renegotiations begin.

Some 83 percent of the execs surveyed by Deloitte said they have renegotiated outsourcing deals to adjust pricing and factor in changes to the business, technology and regulatory environments. Some 45 percent of the respondents include "gain-sharing" clauses in their outsourcing contracts to keep the vendors on their toes. More than half the respondents have moved from long-term contracts (six to 10 years) to shorter contracts to increase their flexibility and bargaining clout.

In many cases, it's not outsourcing or the vendor that's dysfunctional. Deloitte found that 48 percent of respondents didn't have a methodology for evaluating the business case for outsourcing; 81 percent had limited or no visibility into their vendors' pricing and cost structure; 62 percent underestimated their own management requirements; and 57 percent could not free up internal resources for other projects.In other words, many customers are ill-prepared to negotiate the contract and manage the relationship, and they're paying the price. But walking away from a bad outsourcing deal isn't cheap either. Some customers have had to cough up tens of millions of dollars to void their long-term contracts, and it's even more costly (and more difficult) to rebuild an in-house operation.

The point here isn't to bash outsourcing, which continues to make sense for many, many companies, especially those with the expertise and foresight to manage these relationships like they run their core operations. IBM didn't amass a $123 billion market cap on the back of a flawed, dysfunctional business model.

The point is that IT strategy, service, development and support isn't a shrink-wrapped product easily transferred from outsourcer to multiple customers. Although vendors and customers may have conflicting agendas, the successful outsourcing engagement is a partnership in an age in which this overused term has lost meaning. Treat outsourcing with the care and feeding that true partnerships demand.

Rob Preston is editor in chief of Network Computing. Write to him at [email protected].

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