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Big businesses turn their back on outsourcing
Not getting the cost savings they were promised

By Steve Ranger

Published: Thursday 21 April 2005

Major companies are turning their backs on outsourcing because the strategy has failed to cut their costs.

According to research by Deloitte Consulting, companies that were quick to participate in outsourcing are bringing operations back in-house.

More than two thirds of respondents to the Deloitte survey said they have had "significant" negative experiences with outsourcing projects.

One in four participants have brought operations back in-house after realising that they could be provided better – and in some cases at a lower cost – internally.

Cost savings expected from outsourcing did not materialise for 44 per cent of respondents, and nearly two out of three ended up paying for services they thought were included in the contracts with vendors.

Deloitte's senior strategy principal Ken Landis said outsourcing vendors and clients may have conflicting objectives: "The structural advantages envisioned do not always translate into cheaper, better or faster services. As a result, larger companies are scrutinising new outsourcing deals more closely, re-negotiating existing agreements, and bringing functions back in-house with increasing frequency."

The study found that instead of simplifying operations, many companies have found that outsourcing can add unexpected complexity, cost and "friction" into the value chain, and require more senior management attention than anticipated.

Over half of the 25 "world-class" organisations interviewed said they could not free up internal resources for other projects, leading to larger than anticipated deal management overheads.

"In the near term, outsourcing will become less appealing for large companies because it is not delivering the value as promised, and its appeal as a cost-saving strategy will also diminish as the economy recovers from recession and companies look for differentiated solutions to support their growth," said Landis.