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April 13, 2006 - A study by TPI, the leading sourcing advisory firm, has for the first time revealed the true cost savings delivered by outsourcing. The research, which examines outsourcing contracts awarded between 2003 and 2005, disproves widespread market claims that outsourcing can reduce costs by over 60 per cent. In reality, savings net of professional fees, severance pay and governance costs average 15 per cent and range between 10 per cent at the bottom end and 39 per cent at the top. 15 per cent is also the average level of savings anticipated when contracts are first let.
Duncan Aitchison, Managing Director of TPI, commented:
“Opinions vary widely about the cost savings to be gained from outsourcing. 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. In our experience, outsourcing arrangements which focus solely on delivering huge savings often fail to meet client expectations. 15 per cent is not only a realistic saving, but also a significant one.”
TPI’s research, published today in the 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% in 2004 to 21% today.
Duncan Aitchison said:
“Although, clients continue to view outsourcing as a means of achieving cost savings, they are also increasingly concerned with improving the quality of their services. We are seeing an ever-growing number of clients using outsourcing as a way of introducing innovation into their business and the number of TPI-led deals with a ‘transformational element’ has never been higher.”
Strongest first quarter ever for outsourcing contracts
2006 to date has seen the largest number of outsourcing contracts ever signed in the first quarter of the year. So far in 2006 83 contracts have been signed valued at over €18 billion compared with 76 deals valued at just over €13 billion at this point last year. Excluding restructurings, 64 contracts valued at €12.1 billion have been signed so far this year compared with 61 contracts valued at €10.8 billion a year ago.
Duncan Aitchison commented:
“This strong quarter is due in part to the rise in the number of contracts being restructured. However, even when we exclude restructurings, the number of contract signed so far this year is still a first quarter record.”
Who’s gaining market share?
IBM, EDS and T-Systems were the main beneficiaries of the contracts let in the first quarter of 2006, winning total contract values of €3.7 billion, €3.6 billion and €1.1 billion respectively. Meanwhile, the pipeline of deals on which TPI is currently advising is led by EDS, IBM and CSC who are competing for deals totalling €6.4 billion, €6 billion and €4 billion respectively.
2006 to witness flurry of contract restructurings
19 restructuring contracts totalling €6 billion have been signed so far this year. This represents a third of the total value of contracts signed to date – more than double the historical average of 15 per cent. TPI has identified a further 141 contracts totalling almost €33 billion due for restructuring during the remainder of 2006. Examination of deals on which TPI has advised, reveals that the majority (66 per cent) of restructurings occurred as a result of first generation contracts coming to the end of their term, rather than due to any unhappiness with the provider. Indeed, TPI research shows that the incumbent provider tends to be retained when contracts are restructured, although the percentage retained has fallen marginally over the last two years, from 86 per cent in 2004, to 79 per cent so far this year.
Duncan Aitchison commented:
“Although historically, most outsourcing restructurings have been renegotiated with the incumbent service provider, it can no longer be taken as read that the existing provider will retain all or even part of the original deal through a restructuring. Client retention will increasingly depend on an incumbent’s ability to offer a competitive proposition for every facet of the service and this will often require significant changes in price, contractual terms, scope and delivery approach from the original agreement.”
TPI is the sourcing advisory industry founder, and the largest advisory firm in the world focused on a broad range of business support functions and related research methodologies. Applying deep functional domain expertise of accomplished industry experts who possess extensive practical experience, TPI collaboratively works with organizations to help them optimize their business operations through the best combination of insourcing, offshoring, shared services and outsourcing.