White Papers      Webinars  Search

Register for our newsletter:

However, the real cost impact arises as the issue becomes a business problem and constrains strategic freedom for the future as well as the negative effect on current operations,” said Simon Scarrott, Head of Business Development and Marketing at Compass.

Outsourcing is not alchemy — and is failing to achieve cost savings
Compass findings confirm outsourcing providers are pricing contracts to show immediate savings of up 18% below the in-house operation it replaces on day one, only to rise to more than 36% above comparable top quartile internal operations by year three.

Analysis by Compass of 240 contracts over 24 months confirmed that most tier one outsourcing vendors are charging an average of 30% — and sometimes as high as 45% — above the comparable internal market rate in the final years of the contract.

Compass says outsourcers have to be at least 20% better than the in-house operation they replaced just to cover the costs of winning the business and break-even. Additionally, vendors’ requirements to generate profits plus allowances for risk and corporate overhead simply uplift the cost of their service — typically by 20% more than a well-performing in-house operation.

“With those figures, it is easy to see why the claim that all outsourcing will save money is a myth,” said Scarrott. “There can be sound strategic reasons for outsourcing but saving money over the long term is not one of them.”

“Outsourcing providers are not that different from an in-house operation. Indeed, they often use the same people as the in-house operation after the deal is signed and outsourcers cannot perform alchemy on a business process and turn an operation into gold,” he continued.