Outsourcing Survey, Part 1: Who and Where

The results of the 2004 Enterprise Systems Outsourcing Survey are in. In the first of our series, we examine who's outsourcing and where the projects are headed.

Love it or hate it, outsourcing is here to stay. In fact, it’s likely that outsourcing will become even more pervasive over time: With costs savings pegged at between 20 and 55 percent, it’s a strategy few CEOs can afford to ignore.

Among the controversies: job losses to foreign countries, a particularly touchy subject in an election year.

The results of the 2004 Enterprise Systems Outsourcing Survey are in. Over 700 organizations participated, and in the first part of our exclusive report, we examine who's outsourcing and where the projects are headed -- offshore, near-shore, or kept at home.

The full report of our survey findings will be available as a downloadable PDF file in early November. Click here to be notified when the report becomes available.

The controversy over outsourcing obscures an important finding from our survey respondents: comparatively few organizations that participated in our survey are actually sending jobs overseas. In fact, of the companies that have outsourced some (or, in rare cases, all) of their internal applications, services, or operations, relatively few have contracted with offshore providers.

While more organizations will undoubtedly experiment with offshore outsourcing over the next few years, it’s just as likely that many are going to be dissatisfied with these experiences. On top of this, there’s a healthy market for domestic outsourced services, which typically grab the lion’s share of mega-buck deals, our respondents say—70 percent prefer domestic providers.

The reality is that many companies are offshoring with relatively small applications or services (typically of $100,000 or less) and for decidedly finite periods (almost half outsource on a per-year basis)—both of which seem indicative of a pragmatic—rather than a steadfast—comportment to offshoring.

TABLE 1: SUCCESS FACTORS
In your experience, what is the most important factor in successful sourcing projects?

Understanding the goals 27.8%
Selecting the right vendor 24.5%
On-going management 19.9%
A properly structured contract 12.5%
Strategic vision 7.1%
No previous experience 3.7%
Other 2.5%

In your experience, what is the most important factor in successful sourcing projects?Understanding the goals 27.8% Selecting the right vendor 24.5% On-going management 19.9% A properly structured contract 12.5% Strategic vision 7.1% No previous experience 5.7% Other 2.5%

These are among the most salient findings of a recent survey of 744 organizations conducted by Enterprise Systems. Survey respondents were drawn from a broad range of industries, including outsourcing-friendly verticals such as advertising, aerospace, financial services, manufacturing, retail, and telecommunications. Nearly 29 percent of respondents identified themselves as directors, CIOs, and CEOs; another 22 percent were managers, and 49 percent told us they were IT staff, consultants, coordinators, or consultants. All told, more than 71 percent of respondents said they have been directly involved in some aspect of their company’s outsourcing efforts over the last year, while slightly more—72.4 percent—anticipated being involved over the next 12 months.

What did respondents have to say about outsourcing? Some acknowledged being conflicted about outsourcing of any kind—including the domestic variety. Others registered their adamant opposition to outsourcing of the offshore-type. Several—typically respondents who endorsed the outsourcing-ultimately-evens-out theory of economic activity—said they were just trying to do what they felt was best for their organizations.

TABLE 2: NUMBER OF OUTSOURCING PROVIDERS
How many sourcing providers did your most recent sourcing project involve after the final contract was signed?

1 53.4%
2 19.0%
3 5.7%
4 3.7%
5 0.9%
6-10 2.0%
11 or more 1.8%
Don't know 7.7%
Haven't signed contract yet 6.0%

"One of the things you have to understand" about domestic outsourcing is that "you’re cutting loose people who may have a hard time catching on somewhere else for remotely the same [compensation]," says a director of systems development with a U.S.-based firm.

This executive doesn’t believe that domestic outsourcing has to be a zero-sum proposition, however; if an outsourcing provider truly is a best-of-breed vendor at what it does, he reasons, it should be able to compensate its employees accordingly: "If we outsource someone’s job, we try to make sure the contractor will rehire them [to do it] at close to their old salary."

Elsewhere, we found signs that offshore outsourcing doesn’t have a monopoly on executive mindshare, either. In fact, we heard from several executive respondents who admitted to qualms about the practice. "Between the competing claims" of offshore outsourcing proponents and detractors, "I just don’t know what to think," admits an executive with a U.S. automotive manufacturing firm. "I also don’t know if companies who do [go offshore]—I don’t know if that [outsourcing arrangement] is a long-term thing or if just won’t work out for them. I don’t think anyone really knows that."


Who’s Outsourcing Now?

Not surprisingly, one-third of respondents (33.4 percent) to our survey are currently outsourcing some or all of their applications, services, or operations. This total includes a 23 percent tally from organizations that are in the governance stage of their outsourcing arrangements, along with an additional 10.4 percent that are renegotiating terms of existing outsourcing contracts with their providers.

That’s far from a majority, however. As a matter of fact, it’s not even a simple plurality: A combined 42.8 percent of respondents are currently evaluating outsourcing providers, while another 23.9 percent have no outsourcing plans at all (or simply don’t know what their outsourcing plans are).

Nevertheless, the momentum is clearly behind outsourcing: 85.4 percent of current or prospective outsourcers (i.e., at some stage of the outsourcing process) have also farmed out work in the past.

TABLE 3: STAGE OF OUTSOURCING PROJECT
For your most recent sourcing project, what stage in the process is your organization in?
Assessment 21.1%
RFP 9.6%
Selection 12.1%
Governance 23.0%
Renegotiation of contract 10.4%
Don't know 11.0%
Other 12.9%

Across all companies in the sample, 21.1 percent are assessing prospective outsourcing projects; an additional 9.6 percent have already solicited RFPs from potential providers; and 12.1 percent are in the post-RFP selection process. Assuming only that organizations which are at the RFP and selection stages—and aren’t merely assessing potential outsourcing plans—ultimately commit to outsourcing strategies, a slim majority—52.1 percent—will be in the outsourcing camp.


Where Are They Going—Offshore vs. Domestic Outsourcing

Even though the term "outsourcing" has become synonymous with the practice of sending jobs overseas, the bulk of outsourcing activities—70.2 percent—occur on the domestic front, according to respondents to our survey. In fact, only 21.5 percent of respondents say they’ve gone the offshore route, while another 2.8 percent have invested in "near-shore" options (e.g., Canada and Mexico).

Of companies that have solicited RFPs, a majority—almost 69 percent—says they plan to tap the services of domestic outsourcing providers, while an additional 20 percent expect to use offshore providers. Eleven percent did not specify a preference for domestic, near-shore, or offshore providers.

TABLE 4: WHERE PROJECTS ARE HEADED
Is the primary service provider in your most recent sourcing project a firm whose headquarters are:
Domestic 70.2%
Offshore 21.5%
Near-shore 2.8%
No service provider
selected yet
5.5%

Among organizations that have completed the RFP process, a significant number (almost 80 percent) plan to tap the services of domestic outsourcing providers. In fact, just 11.3 percent of companies that have completed RFP evaluations plan to go the offshore route, while 4.5 percent expect to outsource to near-shore providers. An additional 4.5 percent did not specify a preference for domestic, near-shore, or offshore providers.

Most of these companies—52.8 percent—generate less than $500 million in annual revenues. This helps underscore the advice of many outsourcing veterans, who counsel that there are trade-offs—in the form of miscommunication, lack of direction, business misalignment, and other issues—associated with the low-cost offshore model. For some small and mid-sized enterprises (SMEs), these trade-offs may pose unacceptable risks.

"There must be maintained a significant local company influence to offset or counteract" offshoring’s negative long-term effects on business quality, competitive response, and general flexibility, says a consultant with a prominent insurance company who has been involved in both domestic and offshore providers outsourcing efforts.

"Not that it can't work, just that it has much more opportunity to fail. If you retain the same vendor, the problems may disappear over time as they become more seasoned, but then you may lose on competitive pricing," he says. How does this consultant explain the success of offshore outsourcing? "[T]he company gets … a win for playing the game for investors," he points out, conceding that "you get a bigger up-front success hit" in terms of cost savings, with a decline in ROI as a company becomes more vested in the offshore experience.


Revenue Size Matters

Large enterprises with $500 million or more in annual revenues are much more likely than smaller organizations to send jobs offshore.

As it is, an overwhelming majority (97.3 percent) of companies in the $500 million and up category outsource—or are otherwise thinking about outsourcing—to domestic, near-shore, or offshore providers. Of these, 63.6 percent are currently outsourcing—or mulling over decisions to outsource—applications, services, or operations with domestic providers. What is surprising is that this figure is well below the average (70.2 percent) for all companies.

Conversely, 36.3 percent of $500 million and up organizations are currently outsourcing, or are thinking about outsourcing, with near-shore or offshore providers. That’s well above the average (24.3 percent) for all companies.

This disparity grows with each additional billion-dollar increment of revenue. Among companies with $5 billion or more in annual revenue, for example, 53.5 percent have or are mulling outsourcing arrangements with domestic providers. But nearly 43 percent currently outsource—or are otherwise thinking about outsourcing—with offshore providers.

At a certain point, the two extremes even reach parity: 48.4 percent of companies with $25 billion or more in revenue have contracted or are thinking about contracting with domestic services providers; while 48.4 percent have—or are considering—relationships with near-shore or offshore providers.

This parity is short-lived, however, as revenue increases. Among companies with $50 billion or more in revenue, only 43.5 percent currently outsource, or are thinking about outsourcing, to domestic services providers. Instead, 52.2 percent are pursuing relationships with near-shore or offshore providers.