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Outsourcing Industry at a Crossroads: Annual DiamondCluster Survey Finds Customers Questioning Value
Chicago (ots/PRNewswire) -
- Early Terminations Double; Offshore Outsourcing Satisfaction Rates Plummet 17 Percent
Buyers of outsourcing services in growing numbers are dissatisfied with offshore service providers, prematurely terminating contracts and struggling to harvest the full value of their outsourcing relationships -- even as many of those same companies plan to increase their level of outsourcing over the next 12 months, according to new research by DiamondCluster International (Nasdaq: DTPI), the global management consulting firm.
According to DiamondCluster International's 2005 Global IT Outsourcing Study the number of buyers prematurely terminating an outsourcing relationship has doubled to 51 percent while the number of buyers satisfied with their offshoring providers has plummeted from 79 percent to 62 percent.
"The blame cannot be heaped solely on the shoulders of providers," said Tom Weakland, who leads the outsourcing advisory services practice at DiamondCluster. "Many buyers are now several years into at least one outsourcing relationship, but they still lack effective measures to gauge the success of their outsourcing initiatives, which are critical for knowing and getting what you want."
DiamondCluster's third-annual study was the first in which any buyers reported that they are planning to reduce their outsourcing spending. Seven percent will decrease onshore outsourcing and five percent will do the same with offshore outsourcing.
As for outsourcing's benefits, the re-allocation of internal resources to more critical functions was the benefit of outsourcing buyers most often cited (83 percent). Cost savings, generally considered the primary driver of outsourcing decisions, was only second in the DiamondCluster study.
"This finding underscores several things we see going on in the market," Weakland said. "Companies are learning that the tremendous cost-savings outsourcers have been promising are actually very difficult to achieve. And they are learning more about the cost of losing good people and the value of their institutional knowledge."
Other key findings from DiamondCluster's 2005 study of companies that outsource and the vendors who provide IT outsourcing services, which are expanded upon below, include:
@@start.t1@@ -- 40 percent of buyers expect to outsource some IT functions to China
over the next three to five years compared to eight percent last
-- 88 percent of buyers remain concerned about employee backlash, but
worries about anti-outsourcing legislation and political pressure
-- Buyers report that the greatest risks of outsourcing include the
increased complexity of managing relationships, reduced operational
effectiveness, and lower quality of output from their outsourcing
DiamondCluster's "2005 Global IT Outsourcing Report" details the findings of surveys and in-depth discussions with 210 senior IT executives at global 1000 companies and with 242 senior executives at outsourcing service providers in the United States, India and other countries. Research was conducted in late 2004 and early 2005. Copies of the complete study are available on request by sending e-mail to: email@example.com
China Rapidly Emerging as Next Offshoring Hot Spot
In 2004, only six percent of survey respondents said they planned to establish offshore operations in China. Today, that number has soared to 40 percent.
"China is starting to look like India did 10 years ago," Weakland said. "As outsourcing capability in China takes off, it will put deflationary pressure on the traditional providers of commoditized outsourcing services and set an entirely new price point. The most aggressive providers are establishing operations in China now to grab market share. Taking a wait-and-see approach is not an option.
Countries that appear to have fallen out of favor, according to the data, are Israel and Russia.
Providers Keep the "Face of Outsourcing" Out of Sight
While worries about anti-outsourcing legislation and political pressure have dropped dramatically from 85 percent to 50 percent, concerns about backlash from employees, customers and the public persists. Eight-eight percent of buyers remain concerned about employee reactions to outsourcing, 67 percent fret about employee severance costs, 66 percent about customer reaction and 65 percent about negative publicity. Sensitive to buyers' concerns, providers limit their onsite presence to keep the "face of outsourcing" out of sight from employees, according to the study.
"Interestingly, buyers are not overly worried about the impact of competitor criticism or union pressures on their outsourcing endeavors," said DiamondCluster's Weakland. "We feel that this shifting mindset shows outsourcing has become integral to today's business strategy."
Despite war, terrorism and mounting tensions in the Middle East, buyer perceptions of global stability have improved. In 2004, 78 percent of buyers said that concerns about global stability were impacting their outsourcing decisions, but today that number has dropped to 68 percent.
Larger world conflicts are concentrated in regions not typically known for outsourcing and concerns about reactions here at home are taking precedence, according to Weakland.
Providers Get Smart about Pricing
Buyers offered conflicting viewpoints on pricing of providers. While the majority believes rates have remained consistent, 25 percent believe they have increased and 22 percent believe they have declined.
"Providers have worked hard to remove cost as a key differentiator and it appears to be working," said Weakland. "Traditional industry pricing benchmarks are becoming less reliable as an indicator, therefore, buyers must be willing to balance costs and value when negotiating price."
Summing up the major findings of the DiamondCluster 2005 Outsourcing Study, Weakland said: "The organizations we studied make it clear that outsourcing is here to stay, but they are still struggling to execute an optimal sourcing strategy. One-off, transactional outsourcing deals haven't yielded the expected results.
"The future of outsourcing is dependent upon the ability of buyers to think about sourcing IT talent strategically and in using the appropriate metrics to confirm that they are deploying the right resources -- internal or external -- for the right functions," said Weakland. "In turn, it will be up to providers to meet and exceed buyer expectations, or risk losing important contracts."
DiamondCluster International (Nasdaq: DTPI) is a premier global management consulting firm that helps leading organizations develop and implement growth strategies, improve operations, and capitalize on technology. Mobilizing multidisciplinary teams from our highly skilled strategy, technology, and operations professionals worldwide, DiamondCluster works collaboratively with clients, unleashing the power within their own organizations to achieve sustainable business advantage. DiamondCluster is headquartered in Chicago, with offices across Europe, the Middle East and South America. To learn more visit http://www.diamondcluster.com .
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