Cost savings – a reality check!

A significant disparity existed between the perception of buyers and service providers on the actual cost savings via outsourcing.

Exhibit 5: Buyer vs. service provider perception on cost savings via outsourcing

Source: ValueNotes report - Engineering Services Outsourcing: Perception vs. Reality

While a significant number of buyers believed that there were 'no cost savings' due to outsourcing, service providers had a more optimistic view. While 62% of the service providers believed that outsourcing resulted in cost savings between 15-40%, only 44% of the buyers agreed with this.

Will outsourcing grow?

Some findings from the survey on service providers’ perceptions indicated that:

• Almost three fourths (76%) of the service providers claimed that their customers were repeat buyers.
• Most of them believed that their key strengths were domain expertise, service quality, and understanding of customer needs.

Interestingly, satisfaction levels of buyers did not corroborate this perception of service providers. Only 14% of buyers were highly satisfied with their outsourcing vendors, 59% were moderately satisfied and believed that there was scope for improvement, while 27% indicated low satisfaction levels on account of poor vendor execution. A majority of buyers believed that there was still scope for improving the overall service experience. The reasons for outsourcing were not purely the perceived cost savings but also work quality. Buyers who were not particularly keen on outsourcing believed that the ‘inability to maintain the promised quality standards’ was one of the key reasons behind their decision to not outsource.

The ValueNotes ESO survey results indicate that despite issues, a significant majority of manufacturers that already outsource will continue to do so, and will even increase outsourcing by 25% in the next two to five years. India, China and Eastern Europe will be the most favored outsourcing destinations. The flurry in recent contracts activity goes further to substantiate this. We believe that engineering services outsourcing industry is here to stay and will grow at around 20-25% in the next two years and beyond.