10 May 2007 | Paul Snell
Buyers of outsourcing are placing too much focus on the deal and not enough on its long-term effectiveness, causing the sector to experience a "mid-life crisis".
Some 65 per cent of outsourcing deals worth more than £20 million are failing before the contract expires, according to a study released last month by Compass Management Consultants.
Simon Scarrott, head of business development and marketing at Compass, told SM
"price-focused" purchasers were being driven to outsourcing by the incentive of short-term savings.
But Compass found that in the final year of a contract, outsourcing providers were charging up to 45 per cent more than the equivalent in-house function would cost.
It said to cover the cost of the tender process, outsourcing firms should perform 20 per cent better than the in-house operation.
"It is easy to see why the claim that all outsourcing will save money is a myth," Scarrott said. "There can be strategic reasons for outsourcing, but saving money over the long term is not one of them."
He added suppliers needed to promote themselves on something other than cost-savings or they would face lower margins.
Another report, published last month by law firm Addleshaw Goddard, said there was no evident trend toward bringing outsourced functions back in-house, but a third of companies were doing so. Half of them blamed problems with the quality of service and two-fifths that they failed to achieve cost savings.
It also found that procurement was involved in negotiating outsourcing contracts only 34 per cent of the time. Cross-functional teams were more common, but it said these often led to poor continuity.