8th Annual Outsourcing Index: Money Matters

Let's face it. There are many reasons companies choose to outsource. But, when you come down to it, money - and saving a lot of it - still seems to matter more than anything else.

At least this is what the respondents assert in The Outsourcing Institute's 8th Annual Index.

According to the 1,410 new members we surveyed, “reducing and controlling operating costs” is the number one reason they chose to farm out tasks, singled out by 17 percent of the respondents.

Granted, there are many other equally important reasons for outsourcing. For example, 16 percent stated that they outsource so they can improve their company's focus while 12 percent said they outsource to gain access to world-class capabilities and to free up resources for other purposes.

In fact, if you think about it, what companies are saying with those four top responses is that funds are limited. So, they would rather spend money on their own core capabilities and use the rest of the money to purchase specific expertise from the outside.

Money also plays a prominent role when it comes to selecting a vendor.

When the survey participants were asked to single out the three most important factors in selecting a vendor, 21 percent cited “price,” more than any other response.

Of course, other factors seem to be pretty important to outsourcers as well. For example, 16 percent are looking for a commitment to quality while flexible contract terms are important to 12 percent of the respondents. In fact, other outsourcing surveys have found that a major reason outsourcing relationships break down is precisely because the contract was too rigid or too loosely written.

Each year, The Outsourcing Institute looks at its expanding base of outsourcing buyers, comparing the newest members of the firm with the seasoned players. In 2005, 1,491 buyers of outsourcing services signed up to participate in, and receive knowledge and experience from the OI and its constituency. At the enrollment stage, the OI asks a series of questions.

Half of the new members came either from small companies--those with less than one million dollars in revenue--or very large firms--those with more than $2.5 billion revenue streams. Within this group, the split was 50/50, 25 percent from small companies and 25 percent from very large firms.

The balances of the respondents were fairly evenly distributed across the remaining revenue categories. It is important to keep this demographic information in mind when considering the remainder of this document and its graphs.

Expected outsourcing spend responses leaned heavily, 26 percent, toward the Less than $1 million response. Median and Mean cannot be compared year-over-year since the response options were dollar ranges. Some respondents will be at the higher end of the range with others at the low end. Four percent of the respondent pool identified the highest end of the spectrum--over $100 million in outsourcing contracts--as their current contract levels for outsourcing.

In general, more than half of the newcomers to our website are apparently at the earliest stage of their outsourcing process. The Outsourcing Institute has pointed out many times that there are four basic phases to the outsourcing process - Assessment, RFP, Selection and Governance.

According to the survey, more than half (56 percent) are currently at the infant stage - Assessment. In fact, a majority of that group is still defining their outsourcing strategy. This provides evidence that the outsourcing industry itself is still in its infancy with more engagments beginning than being maintained, or ending.

Another 7 percent are at the RFP stage. This means nearly two-thirds of the website's newcomers haven't yet selected their outsourcing partner. This spells opportunity for potential vendors.

Just 12 percent are currently at the selection stage while nearly one-quarter (23 percent) are currently at the final stage - governance.

Alas, with the percentage of respondents at each of these four stages consistent year-over-year, this would indicate that outsourcing is growing in a linear manner rather than exponentially.

So, what do these survey respondents who are seemingly gearing up for their next outsourcing project believe is the most important factor to achieving outsourcing success? Selecting the right vendor (21 percent) was clearly number one.

This was followed by the ongoing management of the relationship. This makes sense, because even if you think you chose the right vendor, you can't put the execution on automatic pilot and expect everything to work out well. You have to stay on top of the vendors, making sure they are fulfilling the promises and the specs detailed in the contract. This is why experts generally liken the outsourcing relationship to a marriage.

Of course, an inevitability of having an outsourcing relationship is that it won't run as smoothly as most would hope. This could happen for a number of reasons.

For example, when we asked our survey participants what internal problems they typically experience, time or the lack of it is cited by one-quarter, more than any other challenge. But, this is followed closely by a lack of expertise (23 percent). Other frequently cited reasons are budget (17 percent) and bandwidth (15 percent).

What are our newest members currently outsourcing and considering outsourcing? It's hard to discern a trend, since we break the responses down to a large number of individual tasks. Just look at the accompanying tables.