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Outsourcing Deals Recycle a Sad History

Over the years, philosophers from Karl Max to Yogi Berra have observed the tendency of history to repeat itself—as tragedy, farce and/or déjà vu all over again. Outsourcing has been around long enough to inspire that haven’t-we-been-here-before feeling. The current surge in outsourcing projects, taking off with the 2001 recession, seems a lot like the […]

Written By: John Moore

Apr 25, 2005

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Over the years, philosophers from Karl Max to Yogi Berra have observed the tendency of history to repeat itself—as tragedy, farce and/or déjà vu all over again.

Outsourcing has been around long enough to inspire that haven’t-we-been-here-before feeling. The current surge in outsourcing projects, taking off with the 2001 recession, seems a lot like the original wave of outsourcing deals in the late 1980s and early 1990s. Recession and debt were among the main drivers that inspired corporations to farm out data center operations and, eventually, network operations and application development services.

It didn’t take long for trouble to start. Deals were renegotiated or abandoned entirely. Today’s outsourcing phase may be hitting a similar wall.

Deloitte Consulting LLP surveyed 25 large enterprises in a range of industries and found that 70 percent had significant negative experiences with outsourcing. The survey results are summarized in a newly released report, “Calling a Change in the Outsourcing Market.”

Ken Landis, a senior strategy principal at Deloitte Consulting, likens the customers’ discontent to marriages gone awry. “Their experience mirrors the divorce rate,” he said. One in five outsourcing deals end in the first two years of the relationship and half fail within five years, according to a Dun & Bradstreet survey cited in Deloitte Consulting’s report.

A number of problems crop up in outsourcing deals. Landis cited a mix of issues including higher than expected contract administration costs and loss of flexibility. As for the latter ailment, Landis said outsourcing customers recognize outsourcing as an attractive tool in a recessionary environment. But as economic growth revives, the overhead of an outsourcing contract renders them “arthritic in the marketplace,” Landis observed.

The Deloitte Consulting report indicates that 64 percent of the respondents have brought some outsourced services back in house.

What will become of outsourcing? If history’s any guide, the practice will likely continue. Outsourcing, after all, survived the earlier bout of corporate discontent. What’s more, outsourcing can deliver value. Today, certain segments of outsourcing, such as human resources business process outsourcing, are boosting service levels and reducing cost for clients, according to industry analysts.

Vendors also have a way of recasting services when customers resist. Around 1992, providers began to develop service lines to make outsourcing more palatable. For example, as client/server deployment began to heat up, some companies began offering transitional outsourcing. The idea: park your data center temporarily with an outsourcer while you figure out how to migrate business applications to the client/server world.

During the same period, co-sourcing and gain-sharing deals began to emerge. The aim was to make vendors and customers more like partners and less like adversaries.

Will variations on these approaches play out in the coming months? One safe bet: Vendors will respond to cues from their customers. The Deloitte Consulting study already points to shorter contracts as an emerging pattern. A little more than half of the survey participants reported moving from long-term, six-to-10-year deals to shorter contracts of up to five years.

Yogi once advised travelers encountering a fork in the road to take it. Service providers face two paths: learning from history or repeating it.

Outsourcing Deals Recycle a Sad History

John Moore

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