The real cost of IT outsourcing deals is higher than most companies signing them expect, and the level of trust between customer and provider is astoundingly low, according to a survey released today by security software developer Lieberman Software.
There are a couple of caveats about the survey itself, but the dramatic percentage of respondents claiming cost overruns and expressing distrust of outsourcers – in addition to the growth in cloud-based IT services as an alternative to traditional outsourcing – show outsourcers and the financial analysts covering them have good reason to be worried.
Only 38 percent of respondents said outsourcers had met the cost-saving projections mapped out in contracts. Twenty-seven percent said the deals cost "significantly more than planned," compared to 11 percent who said outsourcing actually saved more money than their companies expected.
More surprising, 77 percent said they believed their outsourcing providers actually invented work to increase their own fees – an expression of the distrust many in IT have had for offshore outsourcers for decades that has become dramatically stronger in recent years.
That kind of response adds an ominous note to a report showing the number of IT outsourcing deals dropped during the first quarter of this year despite rapid growth in the rest of the market.
The number of IT outsourcing deals dropped 17 percent compared to last year, though three of the four "mega deals" worth more than $1 billion each, were IT outsourcing deals, according to the latest quarterly report from Dallas-based Everest Group.
The two reports may be painting an artificially dark picture, however.
Much of the drop in IT deals is new or temporary – IT outsourcing deals increased at double-digit percentages in both Q3 and Q4 2010. despite steady growth in almost all other areas of the global outsourcing market.
Positive financial results from two of the biggest IT-outsourcing providers in India reassured financial analysts, according to the New Dehli-based Hindu Business Online.
Caveats about the Lieberman survey also makes the result less damning.
Lieberman makes security software primarily designed to be used on-premise, rather than through outsourcers, and the survey was done at security conferences.
Of the 500 people surveyed, only 55 percent worked at companies with more than 1,000 employees – the class of user company that makes up the bulk of outsourcing deals. Only 43 percent said their companies had outsourced a significant amount of their IT.
Even so, any population so skeptical about the ethics and value of outsourcers that three quarters believe service providers purposely inflate fees is not one with a healthy set of relationships between customers and providers.
That – and a congenital need for more control over the technology that could get them fired – will almost certainly add more momentum to companies considering mini-outsourcing deals that turn over sets of applications or sections of infrastructure to cloud-computing providers, rather than large-scale deals that move the bulk of a large company's IT to an offshore provider.
The difference will probably translate into, at worst, a extra few percent of shrinkage for the IT outsourcing market overall, not a complete deflation. Many data centers are actually hiring outsourcers for the same kind of capacity management cloud providers normally think of as their turf.
But the attitude might also help spoil both new and existing relationships between U.S.-based customers and outsourcers based in India and elsewhere.