February 28th, 2007
Some 89% of the customer organizations surveyed by KPMG say they plan to maintain or increase their current level of outsourcing. So why do many of the other survey findings paint such an unflattering picture of these relationships?
KPMG International last week released the results of a survey it conducted on global outsourcing, prompting various pundits to conclude that the industry and customer relationships are stronger than ever.
Perhaps the most positive finding:
Let’s start with KPMG’s attempt to debunk the myth that half of outsourcing deals fail. While
It’s hardly a ringing endorsement when 38% of outsourcing customers think that, to some degree, up to half of these contracts flop.
Meantime, if 47% of customers think their service providers impart experience that they previously didn’t have, then it stands to reason that the other 53% think their outsourcers impart little to no such experience. From my conversations with various IT executives, this is their No. 1 concern with outsourcing: Suppliers, for all their technical smarts, just don’t understand the businesses of their customers.It’s the main reason Sprint Nextel’s Richard LeFave nixed a long-term outsourcing contract with IBM Ã¢â‚¬â€ pulling back “full application ownership, including full life cycle management, architecture, system analysis, and design” Ã¢â‚¬â€ when he took over as CIO of the merged telecom company last year. And it’s why Jamie Dimon did the same thing a little over a year ago when he became CEO of JPMorgan Chase. Dimon has said that the banking giant is as much a technology company as General Motors is a manufacturing company. No outsourcing supplier can know its core business better.KPMG also found that 42% of the customer organizations it surveyed think their outsourcing contracts have definitely improved their financial performance, but only 27% think they have definitely improved their competitiveness. If outsourcing suppliers aren’t doing one or the other for their customers, they’re not doing much.
Part of the ambiguity with these responses goes to another survey finding: 72% of customers say they don’t have, or don’t share with their service providers, criteria for measuring the success or failure of their outsourcing engagements. “Success is ill-defined,” KPMG quotes the CEO of one manufacturer. “Measurement of business benefits is difficult, and there is a tendency not to measure.”Clearly, customers are still finding their footing. Last year revealed a trend toward shorter, smaller, and more specialized outsourcing contracts, producing a record number of total deals, according to advisory firm TPI. However, the fourth quarter of 2006 was the worst fourth quarter in five years when it comes to the overall value of brand-new outsourcing deals. For the year, “total contract value” declined eight percent compared with 2005, to $78 billion, TPI reports.
As much as $100 billion of outsourcing contracts are due for renewal this year. We’ll see how strong these relationships really are.
by Rob Preston, InformationWeek Global Services
Entry Filed under: Why Outsource?