Outsourcing,Companies

Outsourcing leaves many companies dissatisfied in South Africa

02 Sep 2003 | (Survey)

Only about 50% of SA companies that have signed outsourcing deals are happy with the services they are receiving, according to research by Accenture.

The discontent rises to 85% in the financial services sector, with only 15% having their expectations met by an outsourcing service provider. The survey did not ask customers which outsourcing firm they were using, so Accenture is unable to draw any conclusions about who is meeting expectations and whether any are consistently letting customers down.

The findings are in keeping with global dissatisfaction levels, however, and imply that there will be consolidation in the marketplace as customers take their business to the larger firms with trusted reputations, says Accenture chief operating officer Stephan James.

"If 50% of customers are not happy it shows that not everyone is providing high quality service. You will see a consolidation because people will only go to the best providers with critical mass."

The Accenture survey showed that SA customers were generally far more disenchanted with their outsourcing deals than their international counterparts.

"Overall there is disappointment about the delivery and cost savings and a lot of the bigger deals in SA have not delivered (according) to expectations," says Accenture SA director John Bell. "The biggest disappointments are in the financial services sector, where only 15% of companies are happy with their outsourcing deal."

Often the problem is that an outsourcing supplier oversells its services, exaggerating its capabilities, says Bell.

Local outsourcing players do not work on tight margins foreign counterparts do, so the cost savings are subsequently smaller.

"There are a lot of players in the SA market so there is competition, but their margins are not under the pressure that they are overseas. That will probably change as local companies realise what the international margins are," says Bell.

Another problem is that outsourcing firms often clinch deals by agreeing to absorb all the staff who previously ran an operation inhouse, and promise no retrenchments. Yet the staff they inherit might lack the right skills or mental attitude to add value to the outsourcing firm.

Hard-nosed agreements

That can be resolved in time if the outsourcer has hard-nosed performance management agreements in place to prune dead wood, but it may make it unpopular with companies trying to hand over a process without upsetting their staff.

The lack of cost savings from outsourcing is acknowledged by local firms. Most of the 71 SA companies interviewed said their main reasons for outsourcing any process were to let them focus on and improve their core businesses. Cost cutting ranked only seventh in the reasons for outsourcing. Overseas, where the profit margins are lower, cost savings are the third major incentive for outsourcing.

To survive the predicted shakedown, outsourcing firms that specialise in running IT infrastructures must evolve to offer a wider array of business process outsourcing, Accenture believes. That could include human resources, training, accounting and procurement services. Market consensus from a variety of research houses suggests that IT outsourcing will grow only 5% year on year, while business processing outsourcing will grow up to 15%.

Moreover, companies want one partner to handle all their outsourcing needs, rather than juggle a variety of third-party relationships.

This trend prompted IBM to enhance its offerings with the 3,5bn acquisition of PricewaterhouseCoopers Consulting to strengthen its business skills.

The current trend is for transformation outsourcing, where certain operations are taken over by a third party that not only does them more cost-effectively, but also adds efficiency, changing processes. "The real value of outsourcing in the future will be business transformation outsourcing," says James.

"That value means changing your business to increase revenue and customer satisfaction rather than driving down costs. It's not just about up time or how quickly you can solve a problem, but what it does to market capitalisation or bottom line growth."

He believes the new wave of outsourcing will be customer contact management, where a third party takes over a corporate call centre and adds insight to work out how to generate new revenue by selling more products to the same people.

AT&T is among the first to experiment by signing a five-year, $2,6bn deal to outsource such operations.

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