Decay On Net: Outsourced work plagued by cost overruns, underperformance: survey

Here is a very interesting article from Channel News Asia about outsourcing.

Outsourced work plagued by cost overruns, underperformance: survey
By Jeana Wong, Channel NewsAsia | Posted: 19 March 2007 2028 hrs

SINGAPORE : The practice of outsourcing has not really brought in its much-touted benefits for companies, according to Deloitte Consulting's latest outsourcing survey of 280 of the world's biggest global firms.

The survey revealed that outsourced work have been plagued by underperformance and cost overruns, leading companies to start counting beans and to manage such work proactively.

To prevent costly mistakes, legal and accounting experts suggest that companies examine their own processes and think hard about exit strategies.

Outsourcing has been a popular catch phrase among companies looking to cut costs by hiring external parties to provide specific operational services.

But a Deloitte survey has found that outsourcing itself could lead to more staffing and tweaking of the services than expected.

And this ironically raises costs and eats into any expected cost savings.

"Typically, for organisations that outsource, they might have variations in terms of their practices across different regions or perhaps different operating companies. These different practises would mean that they are not able to accept the standardised solution offered by a vendor in a wholesale manner," said Phua Jer Hong, regional practice leader of Strategy & Ops Advisory at Deloitte Consulting.

"In other words, the majority of the organisations have yet to realise the cost savings that they are originally entailed or have identified in their business case. They are also putting in place a larger-than-expected retained organisation to manage outsourced vendors, as well as to manage the outsourcing deal itself."

Rather than being fixated on cost savings, Deloitte suggested that companies think of outsourcing as part of their overall business strategy.

For instance, a company entering a new overseas market could outsource its human resource operations. This would turn what would have been fixed costs into variable costs.

Companies could also transfer their risks and liabilities if they outsource non-core operations like disaster recovery.

Deloitte said companies could also start by centralising and standardising their own processes first before outsourcing what they identified as their non-core functions.

While there are many benefits from outsourcing, legal experts say companies will need to figure out their exit strategies right from the outset, so they are better prepared during transitions or when the relationship with an outsourced partner sours. This is especially if in-house staff have been transferred over to work with the vendor team.

"When you are in a transition out, make sure you think about where these employees are going to go and how you are going to downsize the relationship. Employees for certain jurisdictions in certain countries are, of course, a very political issue, a public relations issue, so you want to make sure you get this right from the outset," said Chin Hooi Yen, associate director of Gateway Law.

"The other thing is intellectual property. You want to ring-fence your IP and protect it throughout the relationship. And when you exit, you're still in control of your intellectual property, and not left it in the control of the vendor."

Of the 70% of respondents in the Deloitte survey expecting cost savings from outsourcing their work, nearly 40% had paid extra or hidden costs for services they believed were included in their contracts.

In the same survey, nearly two-thirds of respondents who outsourced have brought those services back in-house. - CNA /ls