Outsourcing is much more prevalent today than most corporate executives believe. That’s the most surprising finding of the recent Conference Board study.
The Conference Board and Transition Partners Co. in Reston, Virginia surveyed 1,000 Conference Board members to paint a picture of today’s outsourcing trends. They asked 25 questions about 12 different areas of outsourcing. “We asked companies to describe their experiences and plans,” says Howard Lackow, outsourcing practice managing director.
Lackow said he was surprised at how many executives didn’t realize how much outsourcing was actually taking place in their companies. The problem was nomenclature. The companies were outsourcing non-core processes but just didn’t call it that. “Most people are confused and just associate outsourcing with IT,” he says.
He said one company told him they would never outsource anything and preferred to do everything themselves. Lackow called the company to validate the response. He discovered an outsourcing provider managed the company cafeteria. Another provider handled the 401(k) benefit administration program. An third outsourcer produced the payroll.
Another major finding was that buyers were generally satisfied with their outsourcing arrangements. Not one company reported it would even consider bringing back in-house any process they had outsourced. “I didn’t think that would have been the case,” Lackow says. Ninety eight percent said they would continue to outsource in the future.
One reason for the continued support is the respondents reported they were receiving the performance they expected from their vendors. Over half of them (55 percent) felt they had achieved their outsourcing objectives.
The Best Way To Acquire Talent
Not surprisingly, cost was the number one reason why companies decided to outsource. But the other reasons for shedding non-core processes are becoming increasingly important. In fact, Lackow says the gap between outsourcing to save money and outsourcing for other reasons was “closing significantly.”
Today, the survey showed, there is no dominant factor in why companies decide to outsource. Here are the top 10 reasons companies said they decided to outsource:
- Reduce and control costs
- Gain access to world class capabilities
- Improve company focus
- Free resources for other purpose
- Resources not available internally
- Accelerate reengineering benefits
- Function difficult to manage
- Share risks
- Make capital funds available
- Cash infusion
Process expertise is one of the important new considerations. In fields where opportunities are red hot, companies are finding it difficult to hire the talent they need. “The need to find experienced talent to focus on a project was critical,” Lackow reports. Outsourcing helped solve that problem. This was especially true in the IT and BPO fields.
Dot.coms Spur Outsourcing Growth
Outsourcing is also growing because the new dot.com companies are turning to outsourcing from the outset. They realize they need to focus on what they do best and hand the non-revenue generating activities to others who can do it better. In addition, they want a supplier who has experience and who can grow with them. “Outsourcing is a key component in the start up world,” says Lackow.
In fact, having a proven track record was the most important criterion for choosing a service provider. As the marketplace becomes more sophisticated, almost all buyers want experience, according to the survey. Next came the demand for guaranteed service levels.
The survey estimated the U.S. outsourcing market would grow to $345 billion this year, up from $319 billion in 1999. In 1996 the market was just $10 billion. The European market should hit $51 billion by 2003, up from $40.2 billion in 1998.
Outsourcing Growth Areas
The key growth area in the outsourcing field is in the communications area, the survey showed. Internet services, voice and data network management, and user support comprised that segment of the market. Next is the BPO area, including back office, real estate management and accounts payable and receivable. The third bright spot is the ASP market. “People want to rent rather than buy,” says Lackow, although the jury is still out here.
Ninety three percent of the respondents said they currently outsourced some IT and BPO functions. Ninety percent of the respondents said they will outsource in the next three years. However, there are areas companies deem so vital they do not plan on handing them over to someone else. According to the survey, these include IT planning and strategy, and some business processes.
Another finding is the duration of contracts is getting shorter. Among the respondents, the average length of an outsourcing contract was three years.
The biggest obstacle to outsourcing has not changed, however. Organizational resistance can slow the process. Lackow calls this resistance “the fear factor.” People are worried about how a switch to an outsourcing provider will impact them. Companies have to work to allay this fear to make the decision to outsource easier on their employees.
The final obstacle to outsourcing is a buyer’s fear that the supplier won’t be able to perform.
Lessons from the Outsourcing Primer:
- Outsourcing is ubiquitous in American business. However, many executives don’t recognize outsourcing in their companies.
- Most companies are satisfied with the performance of their outsourcing provider.
- No company surveyed plans to bring the outsourced process back in-house.
- Cost is a reason to outsource, but access to process expertise and the ability to receive better service are becoming more and more important.