Local companies not using outsourcing well: survey

This could damage New Zealand companies' ability to compete, says KPMG director

New Zealand companies lag behind the rest of the world when it comes to managing outsourcing of ICT, according to a global survey by business advisory company KPMG.

The survey reveals that local companies are not up to scratch compared with their overseas equivalents in outsourcing efficiency. This could damage New Zealand companies’ ability to compete, says Anthony Hafoka, director of KPMG New Zealand.

“The survey shows that most Kiwi companies are not using outsourcing well or wisely,” he says. “The less competitive you are, the less bottom line profit you make.”

He says most local companies don’t know what the benefits of outsourcing are, don’t track or plan their projects and don’t know the cost of selecting their outsourced provider.

KPMG’s survey, Strategic evolution — A global survey on sourcing today, polled 659 global companies including 30 from New Zealand. Over 80% of the sourcing contracts in the survey refer to ICT outsourcing. The rest are business and knowledge processes outsourcing.

Hafoka did about a third of the interviews with New Zealand organisations. The response he got was that New Zealand companies traditionally haven’t been focusing on competitive value-add in terms of what has been outsourced and what hasn’t, he says.

“New Zealand companies do not monitor or manage projects well, our selection processes are onerous and unwieldy and the importance of involving the right mix of people is often overlooked,” he says.

Over 40% of companies globally see a positive impact on their bottom line from outsourcing, but only 27% of New Zealand respondents said that their outsourcing contracts have definitely improved their financial performance.

“The sense that I got [from local respondents] was that a lot of outsourcing done in New Zealand remains within New Zealand rather than going offshore, whereas many of the other regions, particularly the Americas, are outsourcing offshore to significantly lower-cost economies,” says Hafoka.

Less than 20% of local respondents see a definite improvement in competitiveness from outsourcing, compared with 27% globally, says.

The organisations which were more satisfied with their outsourced provider said that the service provider brought innovation to the contract. They had a flexible contract with the service provider to allow for changing situations, monitored the provider’s performance closely and were happy with service level agreements and cost targets, according to the survey. These successful outsourcing customers also said the purpose of the contract was clear and shared across the relevant parts of the client organisation, and that board-level involvement was limited to a single contact at quarterly intervals.

The “happy” outsourcing customers are predominantly found in North America and the processes outsourced are most likely to be helpdesk and R&D, he says.

For a successful outcome of outsourcing, businesses need to clearly articulate the planned benefits at the start and measure the actual benefits throughout the outsourcing contract, he says. Going into an outsourcing relationship without an agreement on definitive, business-focused measures is a classic reason for poor performance, he says.

Not surprisingly, nearly half of local businesses do not appear to have processes in place to measure those benefits, which makes it impossible to establish the real value of outsourcing, he says.

“Simply going on gut feel is not enough. New Zealand organisations have considerable work to do to ensure they achieve their full potential.”

Sixty-seven per cent of New Zealand respondents said that problems with their outsourcing provider are almost always people-related. A reason for this could be that people and “cultural fit” are considered secondary issues — if at all — during the selection process, says Hafoka.

Globally, 79% of companies did not know the cost of selecting an outsourcing provider. In New Zealand this figure was 87%.

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