TRENDS Includes Business Technographics data

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1 TRENDS Includes Business Technographics data Confronting Outsourcing Myths by Christine Ferrusi Ross with Tom Pohlmann and Olivia Ester EXECUTIVE SUMMARY There are several popular myths about outsourcing: that clients aren t happy with their outsourcing arrangements, that dissatisfaction will lead to a wave of insourcing, and that adding more complexity to sourcing contracts will prevent dissatisfaction. Forrester s latest Business Technographics research into software and services showed that none of these commonly held beliefs are true. Smart clients should forget trying to nail down every potential scenario during outsourcing negotiation and instead focus on the softer side of deals, including relationship building and transition management. FORRESTER S LATEST SURVEY DEBUNKED MANY POPULAR OUTSOURCING MYTHS With the success of outsourcing have come many anecdotes of backlash tales of unhappy clients and a pending wave of insourcing, among others. But Forrester s latest research on adoption trends for software and services does not support these myths, and often outright contradicts them. 1 Most clients are satisfied with their outsourcers. Only 2% of respondents reported being very dissatisfied with the performance of their primary outsourcer, and only another 19% reported they were dissatisfied (see Figure 1). In contrast, a full 57% reported being satisfied and another 22% were very satisfied. This confirms data on vendor management from an August 2005 survey. 2 Big RFP processes don t guarantee outsourcing satisfaction. On average, having an explicit strategy for the evaluation and selection of outsourcing providers doesn t do much to improve satisfaction with the outcome (see Figure 2-1). Firms with explicit evaluation strategies were slightly more likely to be very satisfied, but it turns out that all of the firms who reported being very dissatisfied also had those formal strategies. Insourcing won t come any time soon. Forrester asked respondents about outsourcing plans for the next 12 months and then cross-referenced those responses with outsourcing satisfaction. We found no correlation between satisfaction and future outsourcing plans dissatisfied clients were just as likely to outsource more in the next 12 months as satisfied ones. And being very satisfied didn t stop some clients from planning to take back some work from outsourcers in the next 12 months. Dissatisfaction won t even slow down offshore use. When asked the question about the use of offshore services, dissatisfied clients were no less likely to continue using offshore or expanding offshore than satisfied clients (see Figure 2-2). Headquarters Forrester Research, Inc., 400 Technology Square, Cambridge, MA USA Tel: / Fax: /

2 Trends Confronting Outsourcing Myths 2 Figure 1 Clients Are Satisfied With Their Outsourcers Overall, how satisfied are you with the performance of your primary outsourcer? Very dissatisfied 2% Very satisfied Somewhat 22% dissatisfied 19% Somewhat satisfied 57% Base: 184 IT decision-makers at North American enterprises that are currently outsourcing Source: Business Technographics November 2005 North American And European Enterprise Software And Services Survey Source: Forrester Research, Inc.

3 Trends Confronting Outsourcing Myths 3 Figure 2 Offshore Use Isn t Correlated To Outsourcing Satisfaction 2-1 Having an explicit strategy for outsourcing providers does not guarantee satisfaction Overall, how satisfied are you with the performance of your primary outsourcer? Very dissatisfied Somewhat dissatisfied Somewhat satisfied Very satisfied Company has an explicit strategy for the evaluation and selection of outsourcing providers Company has no explicit strategy for the evaluation and selection of outsourcing providers 4% 18% 54% 24% 20% 60% 19% Base: 179 IT decision-makers at North American enterprises 2-2 Users of IT offshore service providers have satisfaction levels similar to non-users Which of the following statements best describes your company's approach to offshore IT services providers for software services? Don t use and have no plans to Don t use but are considering using Currently using, at a steady rate Currently using and are decreasing our use Currently using and are expanding our use How satisfied are you with the performance of your primary outsourcer? Very dissatisfied (N = 4) 50% 25% 25% Somewhat dissatisfied (N = 35) 46% 6% 17% 26% 6% Somewhat satisfied (N = 104) Very satisfied (N = 41) 44% 13% 19% 18% 5% 46% 20% 12% 20% Base: 184 IT decision-makers at North American enterprises Source: Business Technographics November 2005 North American And European Enterprise Software And Services Survey Source: Forrester Research, Inc.

4 Trends Confronting Outsourcing Myths 4 R E C O M M E N D A T I O N S USE THOSE UNHAPPY OUTSOURCING ANECDOTES AS IMPROVEMENT TOOLS While Forrester doesn t see larger trends behind the anecdotes of unhappy outsourcing clients, that doesn t mean there aren t lessons to be learned from them. Key takeaways include: Distinguish between true failure to perform and water cooler complaints. Often, end users and managers have personal relationships with internal IT and can get favors from their friends like expedited projects or support for technology that isn t officially sanctioned by IT. But when the outsourcer takes over and starts to tamp down on these extras, users become dissatisfied. But while these situations are annoying to the users, they are a key reason why outsourcing is in fact working the outsourcer is reining in unnecessary tasks and reprioritizing projects based on business requirements rather than personal relationships. When crafting an RFP, focus on goals instead of gotchas. As the data show, explicit evaluation and sourcing strategies often don t lead to higher satisfaction than informal ones. This is because too often clients focus on the formal part asking lots of nitpicky details that don t add value (such as requests for each provider to deliver three hardcopy versions of the proposal instead of simply accepting the electronic copy as the official proposal). Clients should focus ruthlessly on questions that will determine outsourcer success such as account management approaches and references rather than worrying about technical details like what kind of font the outsourcer needs to use in its response. Transition management and overall governance matter more than sourcing. While clients obsess over tiny details in the RFP process, most give only a glancing thought to the practicalities of transitioning internal work over to the outsourcer efficiently. Transitioning an environment to the outsourcer and then managing that outsourcer post-transition require collaborative program management. This means going beyond ensuring culture fit and relationship building by having processes and technology in place to support the daily transactions of the contract. 3 ENDNOTES 1 This report analyzes North American data from a Forrester survey of 911 North American and European software and services decision-makers that was fielded in September and October of 2005 in order to understand adoption trends in software technology and services. Source: Business Technographics November 2005 North American And European Enterprise Software And Services Survey. 2 Client satisfaction with cost savings and outsourcer performance against metrics in the BusinessTechnographics August 2005 United States Enterprise Governance Survey was almost identical to the satisfaction in the November study. See the November 23, 2005, Data Overview The State Of Vendor Management And Sourcing: Business Technographics United States.

5 Trends Confronting Outsourcing Myths 5 3 Clients who implement collaborative approaches to transition management and program governance can cut down on miscommunication with the outsourcer and avoid common outsourcing pitfalls. See the November 18, 2005, Trends Outsourcing Success Requires Collaborative Program Management. Forrester Research (Nasdaq: FORR) is an independent technology and market research company that provides pragmatic and forward-thinking advice about technology s impact on business and consumers. For 22 years, Forrester has been a thought leader and trusted advisor, helping global clients lead in their markets through its research, consulting, events, and peer-to-peer executive programs. For more information, visit , Forrester Research, Inc. All rights reserved. Forrester, Forrester Oval Program, Forrester Wave, Forrester s Ultimate Consumer Panel, WholeView 2, Technographics, TechRankings, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each figure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. To purchase reprints of this document, please resourcecenter@forrester.com