Outsourcing firms are still running into conflict with their customers as a result of lack of planning with the result that both sides are having to settle for less out of the relationship.

According to a study by Deloitte, Why Settle for Less , while some 83 percent of companies achieved an ROI of over 25 percent on their outsourcing projects, 49 percent would have defined service levels that aligned better with their companies' business goals if they could start their outsourcing projects again from scratch. A disappointingly small 34 percent of respondents felt they had gained important benefits from their service providers' innovative ideas or transformation of their operations.

But the complaints don't just run in one direction. By a three-to-one margin, outsourcing service providers said 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 to-be organisation would really work.

The purpose of the survey was to document respondents’ experiences and uncover insights that could be applicable across all industries when undertaking an outsourcing programme,” said Paul Robinson, principal, global leader, technology. “A much larger than expected level of company/outsourcer conflict was reported, and many of the companies expressed disappointment with the outsourcers’ overall ability to provide continuous process and technology improvements.”

There are certainly some depressing conclusions to be drawn from the report. Strikingly, 39 percent of the 300 respondents reported that they had terminated at least one outsourcing contract and transferred it to a different vendor in their careers and, of those who reported that they were “Dissatisfied” or “Very Dissatisfied” with their largest contract, half had brought the function back in house. In addition, 61 percent reported that they had escalated problems to senior management in their contract’s first year, with 15 percent reporting five or more such escalations.

"Outsourcing is working financially for a majority of companies in this survey, however, executives' propensity to lead with cost reduction and labour arbitrage without emphasising the need for overall optimisation stymies their companies' chances to realise the full benefits of outsourcing," said Peter leader of Deloitte's Outsourcing Advisory Services group. "The themes of unrealised potential and lost opportunities to use outsourcing as an opportunity to innovate echo throughout this report."

To improve the situation, executives should look at cost reduction as a basic requirement in an outsourcing arrangement and then look beyond this. Most companies are foregoing the much greater benefits that would be generated with a more transformative approach which is not occurring. Only 34 percent of executives surveyed reported significant benefits from innovation/transformation, and just 28 percent of executives had seen benefits from business process reengineering as a result of their outsourcing contracts to increase market share, and turned to outsourcing.

Outsourcing needs to be considered within the context of five other aspects of the business:

• Operational Strategy. Given their focus on cost reduction, most outsourcing initiatives are designed to support a company’s operational strategy. But companies should also think about other aspects of operational strategy beyond cost, such as productivity, the quality of services or products, and time to market.

• Competitive Strategy. Companies need to examine how outsourcing will affect their competitive position. Outsourcing initiatives need to be designed carefully so that they don’t undermine the company’s strategic positioning.

• Financial Strategy. Companies should consider items such as financial engineering, financial risk management, allocation of capital, evaluation of project financing options, financial leverage e.g., debt/ equity ratio), and working capital.

• Marketing Strategy. Examine how outsourcing can support its marketing of products and services, pricing strategy, pace of product or service introduction, and customer service.

• R&D Strategy. Outsourcing can support a company’s efforts to develop innovative products to meet current and anticipated future customer needs.

Deloitte argues that there are a number of questions that companies need to ask before they embark on an outsourcing initiative. These include:

• Did you clearly define the strategy? Companies need to ask themselves 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."

• Do we have 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 as well as cost reductions. When things do not go well in outsourcing, most companies automatically scrutinise the service provider, but do not recognise 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, are you getting what you paid for? It can be tempting to think the signing of the outsourcing contract is the culmination of the outsourcing process. But in reality, effective performance management, especially the insistence that service providers actively search for, develop and implement strategic improvements, is the crowning component of an effective outsourcing initiative.

The Deloitte survey included more than 300 senior executives at mid-size and large companies. Interviews were also conducted with senior executives at 31 of the largest outsourcing providers and with senior partners and partners at several legal firms. The executives and legal firm partners came from the United States (42 percent), the United Kingdom (25 percent) Germany (25 percent) and Canada (eight percent).