Outsourcing meets cost but not strategic objectives

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According to IT services consultancy Deloitte’s “Why settle for less” report, outsourcing is failing to meet strategic objectives.

The report states that although outsourcing suppliers are meeting cost objectives, many of the companies interviewed expressed disappointment with outsourcers’ overall ability to provide continuous process and technology developments.

Firms contracting outsourcing suppliers should be under no illusion that simply by outsourcing a function, innovative changes will manifest. When developing an outsourcing contract, both the supplier and end user need to identify what is expected of both parties.

If there is no explicit statement that the end user wants process and technology improvement, the supplier cannot be expected to provide this. Therefore it is crucial to make it clear from the very start if innovation is expected.

The report states that only 37 percent of firms wanted to improve customer service while only 27 percent were hoping to gain a competitive advantage through outsourcing deals. These figures clearly show that the objectives set by these firms were not strategic but rather cost based.

It is likely that a high percentage of these contracts have been in place for a number of years, at the start of which cost reduction was the prime driver for outsourcing. If the research was to be conducted five years from now, the results would show a much higher emphasis on strategic objectives being met.

With 89 percent of respondents claiming that their outsourcing contract delivered at least 25 percent return on investment, it seems that the primary focus of outsourcing deals of cost reduction is being achieved. It’s only recently that non-financial benefits have taken a leading role in outsourcing contracts.

However, with the looming economic downturn, outsourcing objectives will again shift predominantly to a cost based model as companies are forced to tighten their belts. Given this situation, return on investment that outsourcing is delivering will ensure that it continues to flourish.