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Outsourcing saves less than claimed

The results of a survey has disproved market claims that outsourcing can reduce costs by over 60 per cent.

india Updated: Apr 13, 2006 17:01 IST

Outsourcing of information technology and business services delivers average cost savings of 15 per cent, a survey found on Thursday, disproving market claims that outsourcing can reduce costs by over 60 per cent.

After professional fees, severance pay and governance costs, savings range between 10 per cent and 39 per cent, with the average level at 15 per cent when contracts are first let, according to outsourcing advisory firm 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," Duncan Aitchison, TPI's managing director, said in a statement.

"In our experience, outsourcing arrangements which focus solely on delivering huge savings often fail to meet client expectations," he added.

Cost reduction remains the primary motivation behind current outsourcing contracts, but an increasing number of companies are outsourcing primarily to improve quality, at 21 per cent now versus 11 per cent in 2004.

The first three months of 2006 had the largest number of outsourcing contracts ever signed in the first quarter of a year. TPI found that 83 contracts were signed, valued globally at over 18 billion euros ($21.9 billion), compared with 76 deals worth just over 13 billion euros over the same period last year.

IBM, EDS and T-Systems were the main beneficiaries of contracts let in the first quarter of 2006, winning total contract values of 3.7 billion euros, 3.6 billion euros and 1.1 billion euros, respectively.

The pipeline of deals on which TPI is currently advising is led by EDS, IBM and CSC, which are competing for deals totalling 6.4 billion euros, 6 billion and 4 billion, respectively, it added.