Outsourcing Toolkit

Risks of outsourcing highlighted again

Andy McCue silicon.com

Published: 26 Jul 2005 17:25 BST

Almost two-thirds of outsourcing deals are failing because organisations are only paying lip-service to the small print in the rush to make cost savings, according to new figures.

The statistics, provided exclusively to ZDNet UK sister site silicon.com by management and outsourcing consultancy Compass, reveal that around 59 percent of all outsourcing contracts fail.

Governance problems are the main issue and cited as the reason for failure in 80 percent of those contracts. Andy Chestnutt, MD of Compass Management Consultancy, said that businesses are still failing to properly address the relationship with the supplier, cultural differences and contract management.

"In the frenzy to make cost savings, companies are only paying lip service to governance and often adopt a policy of 'we'll agree to agree later on' when signing contracts," he said.

Despite the high level of failures and the high-profile moves by the likes of JP Morgan and Prudential to bring their IT back in-house the amount of 'insourcing' activity is still relatively low at about 5 percent.

Yet the headline figures show that the potential savings from insourcing a failed outsourcing contract can be as high as 20 to 30 percent — when both the size of the retained IT organisation required to manage the contract and the profit margin taken by the vendor are taken into account.

But Chestnutt said this attractive headline figure for insourcing comes with a large health warning given the trauma and effort required to manage such an exercise.

"Along with the effort needed to bring it back in-house there will be an impact on the books and there are a whole load of other pitfalls that don't make it as attractive a proposition," he said.

The Compass figures are compiled from the consultancy's historical database of thousands of real-life IT outsourcing contracts.