Outsourcing savings prove short-lived

Firms that place too much emphasis on money saving risk unsatisfactory outsourcing contracts

Many organisations are tied into unsatisfactory outsourcing contracts because they place too much emphasis on cutting costs, according to management consultancy Compass.

Simon Scarrott, head of business development and marketing at Compass, said up to 65 percent of outsourcing contracts worth more than £20m are “unravelling before their full term”.

Although firms may achieve savings in the short term, costs often rise to 30 percent or more above those of the in-house operation by year three, Scarrott added.

“It’s partly driven by the heavy involvement of procurement people, who are judged on cost savings, and contract advisers, who measure success on the day-one price,” he argued. “A vendor incurs costs that an internal provider doesn’t have, so the vendor usually has to be at least 20 percent more efficient than you. The clients do not understand enough about what will happen downstream.”

Scarrott advised companies to ensure that those who are expected to manage the contract down the line are involved with due diligence on the outsourcing deal from the outset.

Neil Bradford, chief executive of IT skills marketplace OrderWork, added that many deals can be costly to the outsourcer in the first three years. “So they have to squeeze things and put the prices up,” he said.