An analysis of recent outsourcing studies raises the question: Who is right?
April 2005 yielded a set of divergent announcements on the state of the outsourcing industry. Deloitte Consulting reported that outsourcing was falling from favor with the worlds largest organizations, yet Yankee Group, Hewitt, CitiStreet, and IDC all reported that the BPO market is growing. We find it interesting that four esteemed organizations all report healthy growth while Deloittes findings present a contrasting view. Who to believe? As EquaTerra agrees with the majority on this matter, we thought it might be helpful to dissect some of the findings in the Deloitte study for the readers benefits.
The worlds largest companies should be able to replicate the vendors structural advantages in house
This finding in the Deloitte study goes squarely against accepted developments in horizontal specialization and instead supports vertical integration. Deloitte suggests that large organizations should become vertically integrated and attempt to become self-contained organizations. They probably could, but why would they cut into their profitability by building internal overhead factories when it has been proven that the economies of scale offered by external service providers can deliver non-core processes more effectively and at a lower cost?
25 world-class organizations participated in the Deloitte Study.
In my view, this is far too small a sample size on which to base credible findings. Are they 25 organizations that neglected elements of the requisite pre-contract-signing due diligence? Were the retained organizations and governance teams empowered to make these relationships successful? In HR alone, there are more than 60 comprehensive outsourcing agreements today. Overall, BPO/ITO deals number in the thousands. That one in four of the 25 study participants brought some elements of the processes back in-house doesnt strike me as statistically significant.
Outsourcing is complex
Yes, it is. But that doesnt mean it shouldnt be undertaken. Any organization that has investigated outsourcing with its eyes open, or engaged a qualified advisory firm, recognizes this. While enhancing internal shared servicesor bringing some functions back in housemay ultimately be the answer (EquaTerra on many occasions counsels clients to do so, based on unique situations), complexity should not be an excuse to prevent exploration or execution of outsourcing.
Outsourcing has not lived up to its cost-savings promises.
Buyers should not outsource purely for cost savings. Predictable and variable costs are only one benefit. Buyers should also be benefiting from process improvement, funding of transformation, capital avoidance, shifting focus to strategic areas, and gaining access to external expertise. In EquaTerra engagements, cost savings is the number two or three reason for outsourcing, not number one. Organizations are typically more interested in gaining access to third-party expertise and improving process performance. At the same time, if an outsourcing client only achieves 20-percent savings versus a 30-percent goal, should that be characterized as failure?
Outsourcing generates fundamental risks
Any business activityespecially a business process transformation activity, internal or externalcan generate fundamental risks. Buyers often view internal transformation (i.e., do it ourselves) as less likely to succeed than leveraging a third party. When EquaTerra asks its clients corporate risk management groups to perform their own analysis of achieving the desired SG&A (selling, general and administrative expenses) future state internally versus BPO, more times than not, they depict the internal path as inherently more risky than the external path.
Outsourcing will decline.
Pointing toward a decline in outsourcing is in direct contrast to the Yankee Group, IDC, Hewitt, and CitiStreet reports, as well as every other study and market-sizing effort that has occurred over the past five years. Outsourcing challenges do not mean that outsourcing will decline. Outsourcing is not the only answer for corporations seeking to improve the effectiveness of their SG&A infrastructure, but it is being adopted more frequently now than in the past.
EquaTerra research indicates that the market growth, as with all significant corporate change, must be recognized for its challenges. Defined goals are attainable with appropriate planning, implementation, and effective outsourcing governance. Each of the above-referenced reports is insightful, yet some appear to be more unbiased and reflective of realistic market trends than others.