Outsourcing deals may lead to nothing but short term gains, warn experts

Business Process Outsourcing contracts save organisations money in the first year a contract is negotiated but do not necessarily pay off in the long run, according to experts.

Gartner Analyst, Linda Cohen, advises organisations to take a longer-term view of their partnerships. One occurrence of how a business fails to cut costs from an outsourcing relationship is in circumstances when service providers buy out the organisation’s infrastructure, argued Cohen in a recent report. The organisations will benefit from the cash and asset transfer in the first year, but after that the value “begins to wane,” Cohen added.

“Long-term infrastructure outsourcing contracts that were signed more than three or four years ago are now frequently costing organisations money, because the infrastructure cost today is so much less expensive than it used to be,” said Cohen. “If the original cost has not been renegotiated to current market-bearing rates, then the service is often overpriced,” Cohen added.

This problem is heightened with contracts increasing in price, according to Cohen. “In the early days of IT outsourcing, service providers purposefully priced many contracts at cost or with low profit to create the market for outsourcing before building their client portfolios,” Cohen said. However now service providers are looking for more profit, she explained.

Additionally “organisations with older contracts are finding it difficult to get the kind of high-profile service and attention they were told to expect,” Cohen said, adding that “every time the service recipient requests additional work, the service provider adds a considerable mark-up.” To guard against this change mechanisms should be inbuilt into the original contract to protect “ever-changing business requirements,” Cohen added.

This theory is further supported by research produced earlier this year. A survey by law firm Addleshaw Goddard showed that 59 per cent of the FTSE 350 has had to exit, or re-negotiate, an outsourcing contract before the end of its term, typically due to poor service from the supplier.

Cohen argued that the primary driver for outsourcing should not be cost savings because this will lead to dissatisfaction. She added that an outsourcing relationship should only be agreed to if it means an organisation will gain access to specialist skills, increase its service quality, create new competencies, enhance its ability to budget and control spending or enable the internal IT organisation to “refocus on mission-critical, business differentiating services.”

Cohen also advises organisations to treat with caution the savings claimed by a service provider, and to look at the transition costs that will be involved in outsourcing, restructuring, managing the ongoing relationship. Cohen said sourcing objectives should be agreed by stakeholders in a formal sourcing strategy.

Fifty four per cent of organisations do not have enough people running an outsourcing contract, according to Heart. This means consultants are often brought in who do not have much knowledge of the organisation’s functioning, he added.

Kerry Hallard, NOA communications director, said in order to address this shortage, the NOA will soon launch a course that offers formal qualifications in outsourcing. The course will be flexible and accommodate long-distance students. It will contain executive master classes that take a few weeks to pass, as well as diplomas, certifications and masters qualifications, Hallard said.

Although the British Computing Society has courses that have modules on outsourcing, there is no course completely dedicated to outsourcing alone, Hallard said.