Outsourcing Falling from Grace?

Deloitte & Touche this week e-mailed just about every editor on our staff touting a new study which concludes that IT and business process outsourcing are "falling from favor with the world's largest organizations." It's not exactly headline news - outsourcing wears a permanent "Kick Me" sign on its back - but the reasons for the continued negative sentiment are worth further analysis.

The Deloitte survey, of senior execs at mostly U.S. multinationals, found that 70 percent of respondents "had significant negative experiences" with outsourcing projects. Cost and complexity - ironically, the reasons most companies outsource in the first place - were cited as the biggest problems. One in four respondents said their companies have pulled functions back in-house after realizing they could do a better job or do the job at a lower cost, while 44 percent said they didn't realize any cost savings.

These survey results send me all the way back to September 1997, when I edited the following story lead while working for InformationWeek: "After years of big promises and even bigger deals, the IT outsourcing backlash has arrived. Many users say wholesale outsourcing hasn't lived up to its promise. Some are so frustrated that they're canceling long-term deals and going through the painful process of rebuilding their in-house IT operations." One CIO who had "insourced" observed at the time that almost every big deal more than two years old was being renegotiated or terminated.

So why do long-term outsourcing contracts continue to be shaky propositions? Here's one take: Say Home Depot were to negotiate a long-term deal with EDS. EDS throws bodies at it, but those bodies never increase because there's no financial incentive for the vendor. By the time that contract starts maturing, Home Depot's needs have grown tremendously, so Home Depot calls up EDS and says, "We need to talk"...and the renegotiations begin.

In a later missive, I'll go into other problems inherent with outsourcing, and also talk about its many benefits.