Why the End of the Outsourcing Boom is Good News

The latest headlines proclaim the end to the "outsourcing boom." Three research/advisory firms -- DiamondCluster, TPI and EquaTerra -- have reported this week that they're seeing a slowdown in the growth of outsourcing. In other words, the acceleration of outsourcing has slowed. Let's look at the details.

First, DiamondCluster, because its press release came out earliest. According to the consulting company, "64% of the buyers of offshore outsourcing services and 50% of buyers of onshore services planned to increase their use of such services in the next 12 months, a much lower figure than in previous years. Last year, 74% of the survey respondents said they planned to increase their outsourcing overall."

A DiamondCluster managing partner explained in July 11's The Wall Street Journal that "waning enthusiasm partly reflects mistakes companies have made or unrealistic expectations they have had in earlier outsourcing efforts... ‘They’re not getting the 40%, 50%, 60% cost reductions they thought they would get.’"

It doesn’t stop there. According to the report, companies are reining in outsourcing for three primary reasons: "Either they mistakenly outsourced a process or function that is core to their business and are now bringing those back in-house; their provider over-promised and under-delivered; or the complexity of managing and measuring outsourcing projects and relationships overshadowed the benefits."

This is backed up by additional data. The July 12 issue of WSJ reported findings from advisory firm TPI, which said that although more outsourcing deals were signed in the first half of 2006, the total revenue for the year won’t match last year’s. This is a result of contracts being of shorter duration and more targeted to specific functions. TPI also said that more companies are looking offshore for their service providers (up to 47% from 27% a year ago).

Third, EquaTerra's latest Outsourcing Pulse Survey results reported, "only a modest increase in outsourcing demand growth as compared to 1Q06 and a decline in growth levels year over year, flat to declining deal scope."

Echoing DiamondCluster, the EquaTerra survey identifies several buyer challenges: "finding service providers that can meet their needs and ongoing challenges with transition and outsourcing management and governance (cited by EquaTerra advisors); and in building solid and accepted business cases (cited by service providers)." As the press release for the report states, "These findings collectively highlight areas in which there is room for improvement by both outsourcing buyers and providers."

So, we're discovering a couple of years into the outsourcing boom that outsourcing is really hard. That's good! (I'm always suspicious of booms; I can't stay with the present; I have to dwell on what's around the next bend.)

Now that we're finally seeing the other side of what Gartner calls the "Peak of Inflated Expectations," in its Hype Cycles, we'll soon enter the "Trough of Disillusionment" and finally see the "Slope of Enlightenment." More people will have a more realistic understanding of what outsourcing entails, how to make it work, what is so complex about it, and why it shouldn't be undertaken so readily without a great deal of thought and planning. Outsourcing will have become just another tool, not the end game. And when that day arrives, my job here will be done. (Yeah, right.)