Too low price = potentially difficult outsourcing relationship

That is one of the conclusions of a research, conducted by Giarte and Morgan Chambers during the summer 2004, among 160 companies in the Netherlands. The research also revealed other interesting results.

One of the most significant finding is: IT outsourcing is not necessarily an instrument for cost reduction.

Cost reduction (potentially) hurts! When cost reduction is the major motivation the outsourcing relationship suffers. Only 38% of the companies consider it adequate. Overall, when cost reduction is the primary goal, about 43% of the companies are satisfied.

The picture is different when organisations choose outsourcing as a strategy to increase quality (58% satisfied) or improve processes (52% satisfied).

Remarkably, 42% of the outsourcing deals focused on cost reduction in 2004 (while only 22% in 2002). Quality, or process improvements as a primary goal looses ground in decision making.

Service providers are under high pressure from buyers to offer the lowest possible price. It also means that many companies are taking the risk of having potentially difficult outsourcing relationships on the long run.

Meeting SLA requirements do not mean satisfied customers! Network management is the IT function, most often outsourced. Interesting finding of the research here is that 93% of the service providers reach the agreed service level while only 75% of the clients are satisfied! The situation is the worst in helpdesk services where only 40% of the clients are satisfied while 70% of the service providers reach somehow satisfactory service levels.

So, what do unsatisfied clients do when the outsourcing contract ends (or before, if they can)? They go and find another partner.

According to the research flexibility and risk sharing can help to build a healthy relationship.

Another question the research touches is the type of service providers clients choose. In general clients are better satisfied with smaller, locally oriented service providers (which is a bad news for offshore providers) than with large global players. This is highly due to the fact that large providers often have complicated procedures. But regardless of the fact that clients are more often satisfied with smaller service providers, for their next contract they will, most probably, look for a global company as a partner.

Client satisfaction and the length of the contract show also close relationship. About 43% of the clients are happy with the outsourcing relationships when projects are shorter than 1 year while 60% if the contracting period is between 4-5 years. Interestingly, when the contracting period is longer than 5 years client satisfaction drops again.

Reported by the Automatisering Gids