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[From Supply & Demand Chain Executive, June/July 2006]

Outsourcing

Average Outsourcing Contract Delivers 15 Percent Net Savings

Outsourcing contracts deliver an average of 15 percent savings, despite widespread market claims that outsourcing can reduce costs by over 60 percent, according to a new research by sourcing advisory firm TPI.

The study by TPI examined outsourcing contracts awarded between 2003 and 2005 and found that, net of professional fees, severance pay and governance costs, savings range between 10 percent at the bottom end and 39 percent at the top, with 15 percent being the average level of savings anticipated when contracts are first let.

"Opinions vary widely about the cost savings to be gained from outsourcing," said Duncan Aitchison, managing director of TPI. "This research proves that the promise of massive operational savings is unrealistic when you take into account the costs of procurement and ongoing contract management."

Aitchison said that, in TPI's experience, outsourcing arrangements that focus solely on delivering huge savings often fail to meet client expectations, but he noted that 15 percent is not only a realistic estimate of savings but also a significant one.

TPI's research, published in the firm's quarterly TPI Index, shows that cost reduction remains the primary motivation in current outsourcing contracts. However, an increasing number of companies are outsourcing primarily in order to improve quality, up from 11 percent in 2004 to 21 percent today.

According to TPI, 2006 to date has seen the largest number of outsourcing contracts ever signed in the first quarter of the year. IBM, EDS and T-Systems were the main beneficiaries, winning total contract values of $4.6 billion, $4.4 billion and $1.6 billion respectively.