Outsourcing savings are "unrealistic"

Outsourcing cost savings have been massively over-hyped with the actual cost reduction averaging just 15 per cent, according to new figures from sourcing advisors TPI.

Cost reduction is still the main driver for outsourcing but the research found that when professional fees, severance pay and governance costs are taken into account the highest saving was 39 per cent and the lowest 10 per cent, with an average of 15 per cent cost reduction.

The research covered outsourcing deals awarded between 2003 and 2005.

Duncan Aitchison, managing director of TPI, said 15 per cent is not only a realistic saving but also a significant one.

He said in a statement: "The promise of massive operational savings is unrealistic when you take into account the costs of procurement and ongoing contract management."

TPI's quarterly index of outsourcing deals, based on the pipeline of contracts it advises on, shows that 2006 has seen the largest number of deals ever signed in the first quarter of a year - 83 contracts valued at over €18bn compared to 76 at just over €13bn for the same period last year.

Some of this increase is down to a flurry of outsourcing contracts being restructured, from renewals and extensions to renegotiations.

Contracts worth €6bn have been restructured so far this year and TPI says there are another 141 outsourcing contracts totalling almost €33bn due for restructuring during the rest of 2006.

Around two-thirds of restructuring occurs when contracts come to the end of their term rather than problems with the deal and the incumbent IT outsourcer is retained in 79 per cent of cases - although that is a slight fall from 86 per cent in 2004.

Aitchison warned that it can no longer be taken for granted that the existing IT supplier will retain all or even part of the original outsourcing deal through a restructuring.

He said: "Client retention will increasingly depend on an incumbent’s ability to offer a competitive proposition for every facet of the service and this will often require significant changes in price, contractual terms, scope and delivery approach from the original agreement."

The main IT outsourcers to gain from the first quarter outsourcing bonanza are EDS, IBM and T-Systems who bagged €8.4m of deals between them. The TPI pipeline for the rest of 2006 shows CSC, EDS and IBM in the lead in terms of deal value.