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AIA

Almost two thirds of outsourcing fails

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15th May 2007
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Up to 65% of all outsourcing contracts worth over £20m unravel before their full time, according to a recent study by management consultants Compass. Europe’s €4bn outsourcing industry is entering a mid-life crisis, the report concludes. Uncompetitive costs and negative customer services are blamed for creating “a new mood of mistrust.” Rob Lewis reports.

“The costs to both parties of this level of failure are high and the legal and advisory costs can quickly escalate,” says Simon Scarrott, head of business development at Compass. “However, the real cost impact arises as the issue becomes a business problem and constrains strategic freedom for the future as well as the negative effect on current operations.”

The study analysed 240 contracts over 24 months. Invariably, outsourcing providers priced contracts to show savings from day one, sometimes of up to 18% against the in-house operation. Yet by the final years of the contract most tier one outsourcing vendors were charging an average of 30% above the comparable internal market rate, the highest being 45%.

There can be sound strategic reasons for outsourcing, but the figures suggest saving money over the long term is not one of them.

“Outsourcing providers are not that different from an in-house operation,” Scarrott explained. “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.”

To see AccountingWEB's 10 worst outsourcing disasters click here

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