Reeling in outsourcing deals

EVEN AS OUTSOURCING TURNED INTO a dirty word, plenty of finance executives still viewed it as a necessary evil. More recently, some of them have begun to view it as just plain evil.

At least that's the conclusion of a survey released in April by Deloitte Consulting. "In the real world, outsourcing frequently fails to deliver its promise," wrote researchers, who surveyed 25 companies with average revenues of $50 billion. The study revealed that 70 percent of its respondents have had significantly negative experiences and are outsourcing business processes and IT with increasing caution.

While the survey hardly lays to rest the outsourcing debate, especially since it covers so few companies, there is growing evidence that large companies are rethinking massive outsourcing contracts. Big-name defectors that have unwound at least part of their arrangements include Conseco, Dell, Capital One, and Lehman Brothers.

A sure sign that outsourcing isn't working is the amount of renegotiation surrounding the vendor agreements, says Deloitte senior strategy principal Ken Landis. "There wasn't a single participant in the study whose contract went to term," he says. "All of them had renegotiated prior to the contract expiration period."

Companies are souring on outsourcing, the survey asserts, for the same reasons it has been criticized for years: failure to live up to cost-reduction promises, risks to intellectual property and confidentiality, and lack of transparency.

"What you're seeing is a shift," says Gordon Coburn, CFO of Cognizant Technology Solutions, an outsourcing vendor based in Teaneck, N.J. "Clients are saying that traditional, megadeal outsourcing no longer makes sense." Companies still want to outsource activities to "best of breed" providers, he explains; they just don't want to send everything to one provider.

Despite concerns, companies have been hesitant to unwind outsourcing deals completely. While more than two-thirds of those that outsource have had bad experiences, only a quarter have brought outsourced functions back home. "You'll find fewer organizations moving outsourced services back in-house than vice versa," observes Michael A. Eck, a vice president in the HR practice of The Segal Co. in New York. That's because, for the most part, the business case for outsourcing remains strong, he argues. The labor arbitrage, especially for offshore outsourcers, makes the economics work, asserts Coburn. "We can generate significant savings for our clients," he says.

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