While many organizations in the world now consider outsourcing a standard practice, they could improve their use of this business strategy in three ways, according to the results of Deloitte’s 2012 Global Outsourcing and Insourcing Survey, released today.

Specifically, in making outsourcing decisions, many organizations continue to confuse outsourcing with offshoring, do not address quality adequately, and only use insourcing as a post contract termination strategy one-third of the time.

Deloitte’s survey indicates 60 percent of companies surveyed now see outsourcing as a normal part of their business, while another 19 percent currently are considering it. The remaining 21 percent said they don’t currently outsource and have no plans for considering it a standard business practice.

In the face of this growing trend to outsource, these areas for performance improvement could have an enormous impact. Addressing the first area for improvement by some firms, only 54 percent of companies surveyed distinguish outsourcing from offshoring and view the decisions as one in the same.

“This survey reiterates what we see often in the industry – some companies continue to confuse outsourcing with offshoring,” said Marc Mancher, principal, outsourcing advisory services, Deloitte Consulting LLP. “Many still view the two business decisions as inseparable, even though many times outsourced work does not leave the originating country. The outsourcing decision relates to a function being performed by non-employees (often times domestic) while the off-shoring decision relates to moving the work to a distant location, in many cases for labor arbitrage considerations.

The second area of potential performance improvement relates to the tightening of agreements around the actual scope and cost of work where nearly half (48 percent) of companies have terminated an outsourcing contract. The top reason, cited by 71 percent of respondents, is perceived quality of service. Respondents listed “underestimating scope by the vendor” as the main reason for their dissatisfaction.

The third area for improvement is to consider insourcing some functions. “While appealing and effective for many organizations, outsourcing is not the right fit for everyone,” said Mancher. “As with any major business decision, there are factors to weigh to determine if outsourcing is right for the organization. In some cases, insourcing is a better choice. In fact, we are beginning to see more clients contemplating insourcing functions due to vendor non-performance or changes in a company’s business strategy.”

To improve the quality of outsourcing performance and strengthen relationships with vendors, Deloitte advises corporate leaders to consider the following practices:

Improve deal scope clarity by using a structured decision process, beginning with the initial deal strategy through vendor due diligence. This approach can reduce the possibility of misunderstanding by both parties by providing more specific expectations and contractual documents.

Clearly lay out the transition process with well-defined provisions developed during negotiations and prior to signature.
Establish a vendor-management organizational structure, retained organization design, and internal reporting relationships with clearly defined roles and responsibilities prior to the transition to reduce the possibility of miscommunication.

As outsourcing increasingly becomes an accepted business practice, there are particular business processes showing more outsourcing growth than others. According to the survey, there is substantial support for outsourcing across more of the general and administrative functions with information technology (48 percent) and finance (43 percent) leading in support for outsourcing. Respondents reported that of common general and administrative functions, legal (23 percent) and procurement (22 percent) had lower outsourcing adoption rates. However, the survey also indicates that sales/marketing, legal and real estate/facilities are expected to see the largest uptick in partial or full outsourcing.