LSE warns cheap outsourcing deals pose risks

The cheapest offerings may be more expensive in the long run, say researchers

Firms that select outsourcing providers on the basis of price alone face a greater risk of problems, according to a whitepaper published this week by the London School of Economics (LSE).

The authors of the whitepaper, entitled The CEO guide to selecting effective suppliers, looked at 450 sourcing case studies and found that many firms still select suppliers based on price. They found this approach is contributing to a situation where one fifth of deals cost customers far more than originally expected.

Report co-author professor Leslie Willcocks said that in offering low prices to win contracts many suppliers fall victim to a "winner's curse" whereby the deals excessively favour the clients. This imbalance often damages the clients as suppliers then struggle to provide the required services that may need to go beyond the initial contract terms, he added.

Simon Ormston of outsourcing specialist LogicaCMG, which sponsored the research, said clients should realize that forcing suppliers to work on wafer thin margins could prove counterproductive. "If the supplier is working on insufficient margins they will not be able to be as creative and add as much value," he explained.

The whitepaper recommends that firms should select outsourcing providers based on a range of factors, including flexibility, ability to transform services and willingness to align with their customers' goals.

Meanwhile, LogicaCMG yesterday announced plans to extend its offshore delivery model by opening a new centre in the Philippines. The company said the site would initially employ up to 300 people providing HR, finance and accounting business process outsourcing services, and helpdesk and application services to global customers.