The Savings Are Chump Change


    In "Is extreme outsourcing and consolidation worth it?," InfoWorld columnist Ephraim Schwartz profiles Accenture’s recent deal with Unilever to provide applications outsourcing for seven years and many millions of dollars. In this outsourcing initiative, Unilever will tie its future business processes around Europe to an implementation of SAP.

    Ephraim uses this bit of news as an excuse to ponder the wisdom of the move. First, there’s the possibility of layoffs among IT staff at Unilever. Then there’s the "lock-in" to a single vendor (SAP). Last, there’s the fact that Unilever sells "highly localized products." The writer questions whether efficiencies in the back office might come at the expense of the customer-facing side of the business.

    Then he quotes TPI as saying that outsourcing savings actually only average 15% — after all is said and done (professional fees, severance pay and governance expense). Is it worthwhile to put your company in such upheaval and extreme reorganization for such miserable savings?

    It’s the fourth time in a month where I’ve seen that TPI figure of 15% cost savings quoted in the media. It originated in a TPI Index presentation made in early April. I was there on the call where that number came up, and my notes suggested something different — that the 15% didn’t apply to IT-enabled services and that it was relevant only to the early years of an engagement.

    Apparently, I misunderstood.

    I sent off an inquiry to TPI to get the facts. They responded with some data that will be coming out next week in their TPI Index Insider Report.

    According to Peter Allen, TPI partner and managing director, market development, "ITO transactions, comprising infrastructure and applications services, continue to generate average net operating cost savings just over 15%.

    "BPO transactions, including HR, F&A, CRM and FSO, generate slightly higher average net operating cost savings (17+%)."

    This data is taken from the advisory firm’s own "TPI-advised" contracts during the 2003-2005 timeframe.

    The report further states:

    Furthermore, we noticed that transactions at the lower-end of the total contract value (TCV) spectrum (US$50M to US$199M) have tended toward larger average percentages in net operating cost savings (ranging from 13.4% to nearly 22% in the three-year period). Larger transactions have enjoyed a relatively consistent band of average net operating cost savings among our TPI-advised contracts in this period: Of those contracts valued above US$200M, we saw average net op savings range from approximately 12% to 19%.

    So, this is a reminder — from both TPI and Mr. Schwartz — that easy savings from outsourcing isn’t a foregone conclusion. It requires ongoing budgetary and executive commitment and must encompass a strategy that goes beyond the labor cost of a programmer in India or Eastern Europe vs. a programmer in the US or UK.

    On that latter point, the TPI report points out that "Cost savings are almost always part of a broader agenda for change that motivates the evaluation of outsourcing. Such savings rarely are the sole motivator. Increasingly, the access to specialised skills and process expertise is a key incentive."