Major IT and business process outsourcing deals are costing around 20% more than keeping the services in-house, management consultants warn.
UK firm Compass Management Consulting also warns that two thirds of outsourcing contracts worth more than £20 million (NZ$53.6 million) are “unravelling” before the end of their contract terms.
The research, based on an analysis of 240 deals worth more than £20 million, found that outsourcing providers were pricing contracts to produce savings of up 18% compared with in-house costs in the first year.
But costs then began to escalate, reaching 36% above comparable top quartile internal operations by year three.
Top-tier outsourcing providers were charging an average of 30% — and sometimes as high as 45% — above in-house costs in the final years of the contract.
The providers’ need to cover bidding costs, generate profits and cover risks and corporate overheads were raising contract prices, typically by 20% more than a well-performing in-house operation, Compass says.
Simon Scarrott, head of business development and marketing at Compass, says: “With those figures, it is easy to see why the claim that all outsourcing will save money is a myth. There can be sound strategic reasons for outsourcing but saving money over the long term is not one of them.
“Outsourcing providers are not that different from an in-house operation. Indeed, they often use the same people as the in-house operation after the deal is signed and outsourcers cannot perform alchemy on a business process and turn an operation into gold,” he says.
He adds that businesses were also losing out because of the high level of failure of outsourcing deals. “We are seeing up to 65% of all outsourcing contracts worth over £20 million unravelling before running their full term,” he says.
“The costs to both parties of this level of failure are high and the legal and advisory costs can quickly escalate.”
But the biggest impact of outsourcing failure comes when it “becomes a business problem and constrains strategic freedom for the future as well as the negative effect on current operations,” Scarrott says.