04.27.07
The Slowing Market in Outsourcing – What to Make of It?
Recently, there has been a lot of press coverage over TPI’s analysis of the first quarter’s severe market drop-off in U.S. outsourcing. Many press agencies have picked up the story and, like Chicken Little, are claiming that the sky is falling. Other analysts are calling it, at worst, a temporary blip or a “market correction,†the result of the “maturity in the outsourcing market.†But what’s really going on?
Ann All, in her recent post, captured what may be the essence of the problem:
“Why are diet aids so popular? It’s simple. People want to be skinny without having to exercise or pay any attention to their diets… Many companies seem to have a similar outlook on outsourcing – viewing it as a nearly magical way to slim down those bottom lines. Problem is, as with the diet aids, outsourcing doesn’t always deliver the hoped-for results.†IT Business Edge, Does This Outsourcing Initiative Make Me Look Inefficient? (http://www.itbusinessedge.com/blogs/sts/?p=122)
Could it be that outsourcing is, similarly, the victim of overly optimistic assumptions and too much hype? After all, customers are generally disappointed when they do not realize their promised, albeit unrealistic, savings. A recent Compass survey showing that savings garnered through outsourcing evaporated by the third year, and that outsourced services actually cost more than in-house services in the later years of the contract. Like a fad diet, early weight loss is often more than offset by later weight gain. Basing budgets upon unrealistic savings assumptions almost guarantees that the deal will be perceived as a failure, without regard to its merits. Worse yet, companies have cut internal governance teams to the bone, leaving few skilled resources to manage outsourcing initiatives. All exacerbated by complex agreements that are obsolete when created, leading to “scope creep†and related unforeseen costs.
Suppliers share in the responsibility for C-level disappointment, putting forth loss-leading pricing in an effort to win the deal, only to have to make it up later by counting on the change control process or customer’s undisciplined behavior. Furthermore, suppliers seek to enhance margins over time, both by adding costs and by removing staff. In certain cases, margin enhancement is the only way for a supplier to defend itself against the inevitable call by customers for reduced prices “to meet budget pressure,†but in others, it is a way for the supplier to add revenue without expending substantial resources.
It is no small wonder that these major deals have disappointed customer and supplier alike. It is also no small wonder that potential customers are slowing down and taking a deep breath before starting new outsourcing initiatives, and that suppliers are carefully choosing the projects upon which they bid.
What can be done?
The market, interestingly enough, is responding by moving to shorter, smaller deals and focusing on best-of-breed rather than single solutions. Theoretically, this makes sense, as the “aircraft carrier†deals of old – where the supplier sought to be all things to all people – simply have not proven their worth. However, shorter deals increase the risk profile for suppliers – and will inevitably lead to higher prices. Customers may find themselves in nearly-perpetual states of negotiation and renegotiation, and may as a result find their operational efficiencies further limited by resource constraints and a lack of strategic vision on either side of the deal. Finally, in an environment where governance is generally abysmal, having more deals and more complex relationships to govern seems somewhat counterintuitive.
Perhaps a more effective solution can come from more realistic expectations. If customers realize that outsourcing is not a cost-savings panacea and begin to turn away over-optimistic savings projections, if customer deal teams better manage expectation internally, there will be fewer disappointed customers and “bad deals.†Similarly, if suppliers price with integrity rather than low-balling to get the deal, assist their customers in setting up effective and fair governance systems, and control their insatiable desire for greater margins and fast revenue recognition, they too will suffer fewer disappointments. Fewer disappointments today will lead to more business tomorrow – and may bring steady, reasonable growth to the outsourcing industry.
