Most outsourcing strategies work. If they did not, the industry would be declining, not growing.
According to an international survey published by KPMG in April, ‘Future sourcing – evaluating risks and benefits of sourcing’, three-quarters of respondents said that their organisation’s sourcing strategy had enabled them to improve customer service and deliver cost savings. Two-thirds stated that their sourcing strategies had led to improvements in their global delivery chain.
There is no doubt, though, that some outsourcing deals do not work. It is impossible to assess how frequently that happens because few disasters are reported. The parties involved keep the mishaps and fall-outs to themselves for contractual reasons (such as non-disclosure clauses) and to protect their reputations – even if one party believes it is 100% blameless, the outside world may not see it that way if an outsourcing arrangement collapses in public view.
Roger Sparks, head of the European financial services practice at TPI, a leading outsourcing adviser, says the number of deals that fail, leading to wholesale termination, “is well short of the 50% you sometimes read about”. TPI undertook a study that looked at major deals in 2000 and tracked them over several years. “Since then, only 15% have resulted in wholesale termination, 40% have had some scope expansion, restructuring or have been renewed, and 45% are still active with no change,” says Mr Sparks. Of the 15% that were terminated, the primary reasons for failure were:
- a change in the client’s business strategy or ownership, or new leaders with different ideas;
- the client using the wrong process at the outset to decide on the deal, so that the objectives were not fully reflected in the written agreement;
- the wrong supplier was picked;
- a lack of flexibility in the agreement to allow for change over a period of years;
- lower than forecast cost savings. Customers often forgot about additional costs or retained costs. All outsourced services need some form of management by the customer, and the level of input required was often underestimated.
“The failures we identified were seldom due to the fault of one party, both were at fault,” says Mr Sparks. “But sourcing done right works.”
NS&I’s success story
National Savings and Investments (NS&I), the UK government’s savings agency, did an outsourcing deal with Siemens Business Services (SBS) in 1999. It is widely accepted as a success. NS&I, set up in 1861, offers savings to 26 million customers through telephone, internet, post, standing order, 14,600 post offices and 500 Tesco stores.
Siemens took on the business operations and processes, including the customer call centre and postal correspondence. It migrated several old systems on to one new platform. “As a result, we were able to reduce the number of our employees from 4200 to 130,” says NS&I spokeswoman Elen Thomas.
Siemens does the work with only 1700 people, even though it has added telephone and internet channels and handles much larger savings volumes than when the deal commenced (up from £62bn in 2002 to £75bn today). Siemens staff are employed in operations centres in Blackpool, Durham, Glasgow and, since 2004, Chennai in India.
The original contract was due to expire in 2009, but the management was so pleased with the outcome that in 2004 the contract was extended to 2014. NS&I expects to make cumulative operational cost savings of £500m over the 15-year life of the contract. These savings are coming from modern internal systems, quicker response to market and competitive changes. Customer response times have been cut from 11 days to four days.
“It leaves us to focus on core business and delivering value to stakeholders and improved customer service,” says Steve Owen, NS&I’s partnership and operations director.
“The public-private partnership (PPP) is not a hands-off partnership but a whole business partnership where both NS&I and SBS work hand in hand on all projects to make sure that the needs of both companies are met,” says Mr Owen. “This can be seen in the fact that the SBS account manager is a member of the executive management team of NS&I.”
A National Audit Office report in 2003 said the “deal has delivered much”, that “service to NS&I’s customers has improved” and that “NS&I could not have achieved as much without Siemens Business Services”.
However, it was not all praise: the report also said that both partners underestimated the size of the task needed to turn the business around and this led to lower returns for SBS and some project delays.
ABN AMRO plus five
ABN AMRO did a €1.8bn, five-year IT outsourcing deal with five vendors – IBM, Accenture, Infosys Technologies, Tata Consultancy Services and Patni Computer Systems – in September last year. More than one year on, Lars Gustavsson, the bank’s CIO, says it is running smoothly and few changes have been necessary.
Most IT outsourcing deals require much more change at the outset, he says. Although all of the outsourcing projects in which he has been involved have been successful, most have been modified much more than this one. The reason, in this case, he says, is that the planning has been “more thorough, much more realistic and maybe even more business-aligned than previously was the case”.
The deal involves reducing staff numbers by 1500 between September 2005 and February 2007. IBM took on the lead management role and the bulk of the contract worth €1.5bn. The arrangement, which is expected to save ABN AMRO €258m a year from 2007, is part of the bank’s Group Shared Services programme launched in 2004.
UBS moves on
UBS signed a $1.8bn 10-year contract with Perot Systems of Plano, Texas, in 1996 but announced in 2004 that the deal would not be extended beyond its termination date. The contract outsourced information technology (IT) infrastructure to Perot but UBS has decided to take it back in-house.
Although the refusal to renew the contract received a lot of negative publicity, it is perhaps going too far to say that it failed. It will reach its agreed 10-year lifespan. However, the contract was amended in 2004 to make it easier for UBS to transfer the work back to itself between then and the end of 2006. The public spin put on the termination of the relationship was that the investment bank had changed its business strategy, and that it was not the supplier’s fault.
“Our company and technology strategy have changed since the outsourcing agreement with Perot Systems was forged in 1996,” said Scott Abbey, chief technology officer at UBS, at the time of the announcement. “We are moving forward with a new technology strategy and are thankful to Perot Systems for the success of our past and continuing partnership, and for being flexible in helping us to accelerate the benefits of IT infrastructure.”
JPMorgan Chase cancels deal
A high-profile outsourcing failure was JPMorgan Chase’s $5bn outsourcing contract with IBM. The deal, signed in December 2002, to take care of the bank’s data centres, desktop support and network services, was due to run until 2010, but the bank announced in September 2004 that it would be cancelling it. The 4000 bank staff who had moved to IBM moved back to the bank in January 2005.
The reasons given were a change of mind by the bank’s management about how to control its technology assets, rather than mistakes made by IBM. Following JPMorgan’s merger with Bank One, the new entity decided it had enough in-house capacity to run its own technology.
IBM remains one of the largest technology partners for JPMorgan Chase, providing IT services and products to a number of its major businesses.
“We believe managing our own technology infrastructure is best for the long-term growth and success of our company as well as our shareholders,” said Austin Adams, JPMorgan Chase’s chief information officer, at the time. “Our new capabilities will give us competitive advantages, accelerate innovation and enable us to become more streamlined and efficient. In addition, there will be many career opportunities for returning employees.”
Outsourcing has its merits. Many banks, however, still believe in the maxim that if you want a job done well, with all the added benefits, you might as well do it yourself.
