There is a bit of a bad news for the business process outsourcing sector with a new study stating that hidden costs and added complexity have prompted 25 per cent participants to reduce outsourcing activities.

Various large organisations that were quick to participate in information technology and BPO are bringing operations back in-house, exploring alternatives, scrutinising new outsourcing deals more closely and re-negotiating existing agreements with increasing frequency, the study released on Tuesday by Deloitte Consulting LLP said.

"There are fundamental differences between product outsourcing and the outsourcing of service functions, differences that were overlooked but have now come to the fore," said Ken Landis, a senior strategy principal at Deloitte.

The primary reason for outsourcing boom was cost savings, ease of execution, flexibility, and lack of in-house capability.

However, instead of simplifying operations, many companies found that outsourcing activities can introduce unexpected complexity, add cost and friction into the value chain, and require more senior management attention and deeper management skills than anticipated, the study said.

"In the near term, outsourcing will become less appealing for large companies because it is not delivering the value as promised, and its appeal as a cost-savings strategy will also diminish as the economy recovers from recession and companies look for differentiated solutions to support their growth," said Landis.

"Outsourcing can still deliver value to companies that enter into outsourcing for the right reasons using a right model such as centralise-standardise-outsource, transform-operate-transfer, commodities outsourcing, risk transfer, and shifting fixed costs to variable, and have superb talent in-house to manage these deals from inception to execution."

The study, "Calling a Change in the Outsourcing Market," says that 70 per cent of participants have had significant negative experiences with outsourcing projects and are now exercising greater caution in approaching outsourcing.

One in four participants have brought functions back in-house after realizing that they could be addressed more successfully and/or at a lower cost internally, while 44 per cent did not see cost savings materializing as a result of outsourcing.

Moreover, 57 per cent of participants absorbed costs for services they believed were included in the contracts with vendors. Nearly half of the study participants identified hidden costs as the most common problem when managing outsourcing projects.

The study conducted in person during October -- December 2004, included responses from senior executives, representing global companies, who have both decision-making and operational authority in outsourcing in their organisations.

Nearly half of the participants are part of the Fortune 500; one quarter are privately held or public sector entities and four are headquartered outside United States. Six are part of the Fortune 50, and three are ranked in Fortune Global 100.