Outsourcing; Study: many firms question benefits.

For all the success that outsourcing firms have claimed in the past few years, a recently released study finds a notable undercurrent of dissatisfaction among their customers.

Many of the world's largest organizations that were quick to participate in information technology and business process outsourcing are bringing operations back in-house and exploring alternatives, according to the study by Deloitte Consulting LLP. Ironically, dissatisfaction in areas that traditional outsourcing was expected to improve, such as costs and complexity, was found to be the primary reason behind participants' unhappiness.

The study, "Calling a Change in the Outsourcing Market," reveals that 70 percent of participants have experienced significant troubles with outsourcing projects and are now exercising greater caution. One in four participants have brought functions back in-house after realizing that they could be addressed more successfully and/or at a lower cost internally, while 44 percent did not see cost savings materializing as a result of outsourcing.

Moreover, 57 percent of participants absorbed costs for services they believed were included in the contracts with vendors. Nearly half of the study participants identified hidden costs as the most common problem when managing outsourcing projects.

However, the study did conclude that, if properly structured and done for the right reasons, outsourcing can deliver real value for customers.

"There are fundamental differences between product outsourcing and the outsourcing of service functions, differences that were overlooked but have now come to the fore," says Ken Landis, a senior strategy principal at Deloitte. "Outsourcing vendors and companies may have conflicting objectives, putting at risk clients' desire for innovation, cost savings, and quality. Moreover, the structural advantages envisioned do not always translate into cheaper, better, or faster services. As a result, larger companies are scrutinizing new outsourcing deals more closely, re-negotiating existing agreements and bringing functions back in-house with increasing frequency."

According to the study, participants originally engaged in outsourcing activities for a variety of reasons: cost savings, ease of execution, flexibility and lack of in-house capability. However, instead of simplifying operations, many companies have found that outsourcing activities can introduce unexpected complexity, add cost and friction into the value chain and require more senior management attention and deeper management skills than anticipated.

Additional key study findings that illustrate the kind of pitfalls that may be encountered include:

The anticipated level of value is not always realized:

* 62 percent of participants realized that they require more management efforts in comparison to the original estimates;

* 57 percent said they could not free up internal resources for other projects, leading to larger than anticipated deal management overhead;

* 52 percent ranked cost-related issues as the main risks of outsourcing;

* 81 percent have limited or no transparency to a vendor's pricing and cost structure, increasing the likelihood of paying additional costs;

* 48 percent indicated that they have no standardized methodology to evaluate the business case for outsourcing.

"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-savings strategy will also diminish as the economy recovers from recession and companies look for differentiated solutions to support their growth," says Landis.

"However, outsourcing can still deliver value to companies that enter into outsourcing for the right reasons: using a right model (such as centralize-standardize-outsource, transform-operate-transfer), commodities outsourcing, risk transfer and shifting fixed costs to variable, and have superb talent in-house to manage these deals from inception to execution."