Companies worldwide signed a record number of outsourcing contracts in the first quarter, but the deals are likely to save businesses only about 15 percent, much lower than the 60 percent savings that managers typically expect, an outsourcing advisory firm said Thursday.

TPI said that contrary to popular perception, savings from outsourcing after professional fees, severance pay, and governance costs in reality hover at around 15 percent. They can range from as much as 39 percent savings to as little as 10 percent, compared with the cost of keeping the work in-house.

“Opinions vary widely about the cost savings to be gained from outsourcing,” said Duncan Aitchison, managing director of TPI. “This research proves that the promise of massive operational savings is unrealistic when you take into account the costs of procurement and ongoing contract management.”

“Opinions vary widely about the cost savings to be gained from outsourcing,” said Duncan Aitchison, managing director of TPI. “This research proves that the promise of massive operational savings is unrealistic when you take into account the costs of procurement and ongoing contract management.”

TPI examined outsourcing contracts awarded between 2003 and 2005.

between 2003 and 2005.

Despite the conclusions, TPI said 2006 promises to be a record year for outsourcing deals. So far, 83 contracts have been signed valued at over €18 billion ($21.78 billion), compared with 76 deals valued at just over €13 billion ($15.74 billion) at this point last year.

Excluding restructurings, 64 contracts valued at €12.1 billion ($14.65 billion) have been signed so far this year, compared with 61 contracts valued at €10.8 billion ($13.07 billion) a year ago. “This strong quarter is due in part to the rise in the number of contracts being restructured,” said Mr. Aitchison. “However, even when we exclude restructurings, the number of contract signed so far this year is still a first quarter record.” Cost Driving Outsourcing

TPI said its quarterly TPI Index that tracks outsourcing deals worldwide showed that cost reduction remains the primary motivation in current outsourcing contracts.

But that’s changing. An increasing number of companies are outsourcing primarily in order to improve quality, reaching 21 percent today from 11 percent in 2004.

“Although, clients continue to view outsourcing as a means of achieving cost savings, they are also increasingly concerned with improving the quality of their services,” said Mr. Aitchison.

Although, clients continue to view outsourcing as a means of achieving cost savings, they are also increasingly concerned with improving the quality of their services,” said Mr. Aitchison.

The biggest beneficiaries of outsourcing contracts have been IBM, EDS, and T-Systems, winning total contract values of €3.7 billion ($4.48 billion), €3.6 billion ($4.35 billion) and €1.1 billion ($1.33 billion) respectively, in the first quarter of 2006, said TPI.

IBM

Indian IT companies like Infosys and TCS disputed TPI’s claims, saying they help customers save more than American companies like IBM and EDS. Infosys said it typically undercuts them by 30 percent or more. Business models for traditional IT companies are “outdated, cumbersome, and incredibly expensive,” said Peter McLaughlin, an Infosys spokesperson.

Finding the Right Fit

The TPI report fails to make a distinction between the business models of companies like IBM and those that originated in India, said experts. Giant IT organizations like IBM are likely to have more overhead and can cost customers more compared to smaller IT shops, said Richard Garnick, president of North American services for Keane, a business process outsourcing company.

India

“It’s a matter of finding the right fit,” said Mr. Garnick, who was formerly the CEO of Americas for Indian IT player, Wipro. “The industry is so large and some customers are better served by companies that run a leaner operation.”

Wipro

Still, Mr. Garnick said that customers would be better off expecting savings in the range of 20 percent to 30 percent on average, rather than relying on numbers like 60 percent savings.

This year will also see a number of contracts being restructured. That’s because many of the first generation contracts are coming to an end and not because of companies are unhappy, said TPI. In the case of a restructuring, incumbents are likely to retain control over the contract, though the percentage retained has fallen marginally over the last two years, from 86 per cent in 2004, to 79 per cent so far this year, said the organization.

first generation contracts are coming to an end and not because of companies are unhappy, said TPI. In the case of a

This is in keeping with the right outsourcing strategy that requires companies to treat their outsourcing vendors as partners rather than commoditized players.

“If you think of them at a commodity level, then you can get the price you want but you have to go through a long process that will cut out most of your cost savings,” said Mr. Garnick. “But when you go in and leverage shared best practices and re-engineer the process and efforts, you can see big value.”