More than half of top firms renegotiate outsourcing terms

Almost two-thirds (60%) of FTSE 350 companies have had to exit or re-negotiate an outsourcing contract before the end of its term, typically due to poor service from the supplier.

The finding is the result of a survey conducted by law firm Addleshaw Goddard , which questioned sourcing and legal experts at 68 of the FTSE 350 companies.

The survey also showed that one in three UK organisations have taken or intend to take a business function that has been outsourced back in-house.

Over half of those companies have cited service quality problems as the main driver and two fifths said that the failure to deliver cost savings was the reason behind their decision.

The firms questioned in the survey were mainly operating in the financial and retail sectors, markets that have seen widespread outsourcing. The survey explored organisations’ approaches to managing the outsourcing contractual process and the key issues that companies face at each stage.

The study found that the main risk associated with exiting was inadequate exit planning – 24% of respondents said that their company had been significantly impacted by inadequate exit planning.
Exiting was the area where companies felt the least confident in their abilities as part of the whole outsourcing process.

The survey also found that high profile outsourcing disasters do not appear to have increased concerns about outsourcing risks.

Only one fifth (21%) of respondents said that problems, such as the recent Gate Gourmet and BA dispute, have prompted their boards to take a closer look at outsourcing risks.

Board involvement in outsourcing is directly correlated to the size of the deal – although 91% of respondents said some contracts were signed off by the board.

Regarding the perception of outsourcing risks, 21% thought that the deterioration in the quality of the outsourced service process was the factor most likely to cause the failure of outsourcing.

Lack of control was cited as the second largest risk, by 18%. Hidden costs associated with outsourcing contracts were deemed less risky, with 13% citing this risk.

With regard to the outsourcing lifecycle, transition is seen as the riskiest phase. Lack of internal resource to affect transition (cited by 69%) and lack of supplier skills (41%) were seen as the main risks in transition.

Margaret Harvey, head of the technology and outsourcing team at Addleshaw Goddard, said, “The research has uncovered a number of hidden outsourcing truths. Companies often embark on outsourcing with rose-tinted spectacles – they don’t adequately anticipate what could happen when outsourcing goes wrong.”