Many Companies Repatriating Outsourced Functions

April 19, 2005 ( - Many firms are bringing outsourced functions back-in house, citing dissatisfaction with a lack of cost savings and a failure of the process to reduce complexity, according to a Deloitte survey.

The study – Calling a Change in the Outsourcing Market – shows that 70% of participants have had significant negative experiences with outsourcing projects and are now using greater caution in approaching outsourcing. Twenty-five percent have already brought functions back in-house, with a large minority (44%) claiming that they did not see cost savings as a result of outsourcing. Fifty-seven percent also claimed that they absorbed costs for services that they believed were included in the contracts with vendors, but actually were not. In fact, almost 50% claimed that hidden costs were most common problem when managing outsourcing projects.

According to the study, companies engaged in outsourcing activities for a variety of reasons, including cost savings, ease of execution, flexibility, and lack of in-house capability. However, instead of simplifying operations, many companies stated that outsourcing activities can introduce unexpected complexity, add cost, and require more senior management attention and more management skills than anticipated.

Flushing out these concerns, the study found that 62% of participants realized that outsourcing activities require more management efforts in comparison to the original estimates. Fifty-seven percent said they could not free up internal resources for other projects, leading to larger than anticipated deal management overhead than originally thought, as well.

Fifty-two percent of participants placed cost-related issues as the main risks of outsourcing, with 81% claiming that they have limited or no transparency to a vendor’s pricing and cost structure, which often results in increased chances of paying additional costs.

For vendors, the landscape is also changing. Fifty-three percent of participants have moved from long-term contracts – six to ten years – to shorter contracts – up to five years -to increase flexibility and bargaining power.

The participants in the study   included 25 organizations in Manufacturing, Transportation, Consumer Business, Energy, Financial Services, Technology/Media/Telecommunications, Health Care and the Public Sector.