However, many of those same companies plan to increase their level of outsourcing over the next 12 months, the study by Chicago based management consulting firm, DiamondCluster International showed.
The number of buyers prematurely terminating an outsourcing relationship has doubled to 51 percent while the number of buyers satisfied with their offshoring providers has plummeted from 79 percent to 62 percent.
China will be emerging as next outsourcing hot spot. In 2004, only six percent of survey respondents said they planned to establish offshore operations in China. Today, that number has soared to 40 percent, the study says.
"China is starting to look like India did 10 years ago," Tom Weakland, who leads the outsourcing advisory services practice at DiamondCluster, said.
"As outsourcing capability in China takes off, it will put deflationary pressure on the traditional providers of commoditised outsourcing services and set an entirely new price point. The most aggressive providers are establishing operations in China now to grab market share. Taking a wait-and- see approach is not an option," he said.
Countries that appeared to have fallen out of favour, the study said, were Israel and Russia.
The study was the first in which any buyers reported that they are planning to reduce their outsourcing spending. Seven percent will decrease onshore outsourcing and five percent will do the same with offshore outsourcing.
As for outsourcing's benefits, the re-allocation of internal resources to more critical functions was the benefit of outsourcing, buyers (83 percent) cited .
Cost savings, generally considered the primary driver of outsourcing decisions, was only second in the DiamondCluster study.
"This finding underscores several things going on in the market," Weakland said. "Companies are learning that the tremendous cost-savings outsourcers have been promising are actually very difficult to achieve. And they are learning more about the cost of losing good people and the value of their institutional knowledge."
While worries about anti-outsourcing legislation and political pressure have dropped dramatically from 85 percent to 50 percent, concerns about backlash from employees, customers and the public persists.
Eight-eight percent of buyers remain concerned about employee reactions to outsourcing, 67 percent fret about employee severance costs, 66 percent about customer reaction and 65 percent about negative publicity.
Sensitive to buyers' concerns, providers limit their onsite presence to keep the "face of outsourcing" out of sight from employees, according to the study.
"Interestingly, buyers are not overly worried about the impact of competitor criticism or union pressures on their outsourcing endeavours," said Weakland.
