Outsourcing Works

Business executives worldwide strongly believe their outsourcing arrangements are beneficial, even as most struggle to determine exactly what constitutes a successful arrangement with a vendor, according to new research by the audit, tax and advisory firm KPMG LLP. KPMG LLP, an audit, tax and advisory firm, is the U.S. member firm of KPMG International.

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“There are several key points that came out (of the survey),” said Kalpana Ramakrishnan, a principal and leader of KPMG’s Sourcing Advisory Services practice in the Americas and one of the study’s co-authors. “One is that outsourcing is working but we found out that people aren’t monitoring the benefits from it as well as we thought they were. And even where organizations are monitoring the benefits, it was more on the tactical level … as opposed to, ‘How is this helping my overall business’.”

According to the KPMG survey of 659 global business executives, 42% of their outsourcing arrangements are not supported by a formal strategic measurement framework. As much as 79% of companies did not accurately know the cost of selecting an outsourcing provider.

What this means is these organizations are not realizing the full potential of their outsourcing arrangements, said Ramakrishnan. If they were to look at things from a strategic perspective they would have much better understanding of where the relationship is lacking and where it is working well. Just measuring the contract against the service level agreement (SLA) is not enough.

“Most companies look at outsourcing as a positive. But taking that a step forward you could make that even more successful if you start the measurement and monitoring on a strategic basis,” she said. “Because, one, if you’re not measuring it internally, you don’t know how successful you are on a strategic basis and, secondly, if you’re not communicating that with your vendor, then the chances of making it even more successful is not there because you don’t have a process in place. So we are saying take it to the next step.”

As much as 50% of survey respondents said they took longer than six months to complete the Request for Proposal (RFP) part of the outsourcing process, while 60% and 59% of customer organizations and service providers, respectively, said that problems encountered throughout the sourcing process are related to the people involved in managing the project.

Only 12% of customer organizations and nine percent of service providers reported their sourcing problems are technology-related.

Additional the survey found:

  • Sixty-two percent of survey respondents believe that the statement “up to 50% of outsourcing contracts fail” is “an oversimplification;”

  • Eighty-nine percent of survey respondents expect to maintain or increase current sourcing levels within teir organizations; and

  • Only 14% claim to have had a significant misalignment of financial and commercial expectations between provider and client.

    “The main thing that struck me was that there is not as much negativity about outsourcing,” concluded Ramakrishnan. “In general, the perception is outsourcing contracts fail as often as not and the (survey) results were quite different. We heard from our clients that is not true.”


    KPMG’s survey was based on in-person surveys of 659 companies across the world between June and November 2006. More than 50% of respondents were c-level executives.