February 28, 2008 09:22 ET

Deloitte Report: Outsourcing Initiatives Hampered by Poor Planning and Narrow Focus on Cost Savings

Canadian organizations lag behind global peers in reaping financial and other benefits of outsourcing projects

TORONTO, ONTARIO--(Marketwire - Feb. 28, 2008) - Poor planning and a narrow focus on cost reduction are hampering the full benefits that Canadian and other enterprises around the world can realize from their outsourcing operations, according to a new study released by Deloitte. The global survey of more than 300 mid- and large-sized corporations and outsourcing service providers found that, while 70% of the executives globally (fully 60% of all Canadian respondents) were satisfied or very satisfied, there were still benefits that were not fully realized. Of note, only one-third (34%) of the respondents gained important benefits from their outsourcing service providers' innovative ideas or transformation of their operations.

The study, titled "Why settle for less?", also revealed that Canadian companies are lagging behind their peers in reaping the financial benefits of outsourcing projects. While the average return on investment (ROI) achieved from outsourcing projects averaged just over 25% ROI globally, Canadian respondents reported only 15%.

"Survey findings clearly show that there is room for improvement, and that companies should re-evaluate and step up the targets they set for outsourcing projects - looking beyond immediate concerns of cost savings through labour arbitrage or economies of scale," says Gordon Shields, partner in Deloitte's Consulting practice. "The strength of our dollar, the effect on Canada of economic concerns south of the border and a shrinking workforce should act as triggers for Canadian companies to strategically improve or optimize the way they plan for and manage outsourcing projects; thereby leveraging them to gain access to global talent and technological expertise."

Underestimation of scope, inability of service providers to control costs internally and over-time/over-budget hidden costs were cited as the top three financial issues Canadian companies currently face on outsourcing projects. Staffing and quality of support/delivery were also quoted as the main non-financial issues.

In contrast, by a 3-to-1 margin, the outsourcing service providers polled revealed that their client companies did not have a solid outsourcing plan, lacked the operational data needed to make sound decisions and did not understand how the re-structured organization would really work. Such contradictory findings suggest a failure to properly define the goals of the outsourcing projects beyond saving money.

"Outsourcing should be regarded as a strategic business decision beyond a mere cost-savings initiative, and companies should view it as a means to fundamentally transform their operations and drive dramatic improvements in efficiency, productivity and reliability," states Shields.

While there is no single right way to use outsourcing for each company, the following aspects of an outsourcing deal to see if they need to correct their course, even in mid-stream, should be considered:

- Clearly define the strategy - Companies need to evaluate if they are outsourcing the right things for the right reasons. Transferring a dysfunctional operation to a vendor in hopes of saving costs through economies of scale or arbitrage can be a case of "your mess for less."

- Establish a solid foundation - Companies need to ask if they have defined and quantified what they expect from outsourcing. The creation of a business case and the establishment of effective service level agreements (SLAs) should not be given short shrift; but in practice this is too common.

- Vendor selection now means something different - Companies need to select the right service provider; one that is capable of delivering strategic process improvements and cost reductions. When things do not go well in outsourcing, most companies automatically scrutinize the service provider, but do not recognize that their decision to select a vendor on cost alone may be the actual root cause of their problems.

- Striking the deal - Companies need to ask if their contracting process is mutual and flexible. Contract negotiation is a pivotal point in the outsourcing process.

- After the deal is signed - It can be tempting to think the signing of the outsourcing contract is the culmination of the outsourcing process. In reality, focus on long-term operations and effective performance management - in particular, the insistence that service providers actively search for, develop and implement strategic improvements - is the crowning component of an effective outsourcing initiative.

About the survey

This survey included more than 300 senior executives at mid-size and large North American and European companies. Twenty-five Canadian respondents from large enterprises (more than 1,000 employees) took part in the survey. Annual dollar spent of the outsourcing projects referenced in the survey was a minimum of US$50 million for IT outsourcing and US$30 million for business process outsourcing. Access the full report.

About Deloitte

Deloitte, one of Canada's leading professional services firms, provides audit, tax, consulting, and financial advisory services through more than 7,600 people in 56 offices. Deloitte operates in Quebec as Samson Belair/Deloitte & Touche s.e.n.c.r.l. The firm is dedicated to helping its clients and its people excel. Deloitte is the Canadian member firm of Deloitte Touche Tohmatsu. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms have any liability for each other's acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names "Deloitte," "Deloitte & Touche," "Deloitte Touche Tohmatsu," or other related names. Services are provided by the member firms or their subsidiaries and not by the Deloitte Touche Tohmatsu Verein.

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