Companies that outsource services purely to cut costs are likely to set themselves up for short-term gains and long-term criticisms from management, according to Gartner. Gartner research continues to show that reducing cost remains one of the primary drivers for outsourcing, but placing too much emphasis on cost reduction usually leads to dissatisfaction because many savings are either unsustainable or never achieved.
"At the beginning of a large outsourcing programme, organisations can expect the service provider to offer economies of scale that most individual companies cannot secure themselves," said Linda Cohen, vice- president and distinguished analyst at Gartner. "However you can only expect to receive that cash infusion once; by the second or third year, those ‘economies’ are forgotten about, the people originally involved have moved on and all too often the value of the relationship begins to wane."
Ms Cohen advised that some long-term infrastructure outsourcing contracts that were signed three or four years ago can even be costing organisations more money because the infrastructure costs today are less expensive than they used to be. She said that if the original contract has not been renegotiated to current market rates then the service will often be overpriced.
"In today’s uncertain and changing business environment, the ‘steady state’ of business that was presumed at the outset of a contract is seldom realistic and organisations cannot just presume that outsourcing will save money in the long-term," Ms Cohen warned. "Of course controlling costs over time is one of the main reasons for entering into an outsourcing relationship but this needs to be balanced against the other major benefits of outsourcing."
Ms Cohen advised that any organisation considering outsourcing an IT function must first establish realistic goals that will satisfy the executive sponsors of outsourcing, as well as the best interests of the organisation. Only then can the correct scope of work and proper terms and conditions be constructed to deliver long-term value.
Gartner’s research shows that the five major, realistic goals for outsourcing are:
- To control cost over time. An outsourcing arrangement can create a more-controlled operating environment and force the organisation to conform to hardware and software standards. Eventually, this will enhance the IT organisation’s ability to budget and control spending.
- To provide access to highly skilled technical resources as needed. This also avoids the issue of having to attract, retain and retrain specialised staff as full-time employees and is particularly important for organisations that cannot compete with private industry and service providers.
- To enable the internal IT organisation to refocus on mission-critical, business-differentiating services to provide a higher level of strategic value to the business units. This should be the immediate goal of every chief information officer (CIO), but without first outsourcing the day-to-day tactical operations, there will be no time or budget to make the transition.
- To increase the quality of service delivery where internal investment in new skills and technologies necessary to increase service quality is not available or sustainable.
- To create access to scalability without the investment of time and capital expense necessary to develop that capability externally.
"There is no doubt that cost is a significant factor in any outsourcing arrangement," said Ms Cohen. "However, organisations need to take a longer term view of what an outsourcing relationship can accomplish for their operations overall."
"At the beginning of a large outsourcing programme, organisations can expect the service provider to offer economies of scale that most individual companies cannot secure themselves," said Linda Cohen, vice- president and distinguished analyst at Gartner. "However you can only expect to receive that cash infusion once; by the second or third year, those ‘economies’ are forgotten about, the people originally involved have moved on and all too often the value of the relationship begins to wane."
Ms Cohen advised that some long-term infrastructure outsourcing contracts that were signed three or four years ago can even be costing organisations more money because the infrastructure costs today are less expensive than they used to be. She said that if the original contract has not been renegotiated to current market rates then the service will often be overpriced.
"In today’s uncertain and changing business environment, the ‘steady state’ of business that was presumed at the outset of a contract is seldom realistic and organisations cannot just presume that outsourcing will save money in the long-term," Ms Cohen warned. "Of course controlling costs over time is one of the main reasons for entering into an outsourcing relationship but this needs to be balanced against the other major benefits of outsourcing."
Ms Cohen advised that any organisation considering outsourcing an IT function must first establish realistic goals that will satisfy the executive sponsors of outsourcing, as well as the best interests of the organisation. Only then can the correct scope of work and proper terms and conditions be constructed to deliver long-term value.
Gartner’s research shows that the five major, realistic goals for outsourcing are:
- To control cost over time. An outsourcing arrangement can create a more-controlled operating environment and force the organisation to conform to hardware and software standards. Eventually, this will enhance the IT organisation’s ability to budget and control spending.
- To provide access to highly skilled technical resources as needed. This also avoids the issue of having to attract, retain and retrain specialised staff as full-time employees and is particularly important for organisations that cannot compete with private industry and service providers.
- To enable the internal IT organisation to refocus on mission-critical, business-differentiating services to provide a higher level of strategic value to the business units. This should be the immediate goal of every chief information officer (CIO), but without first outsourcing the day-to-day tactical operations, there will be no time or budget to make the transition.
- To increase the quality of service delivery where internal investment in new skills and technologies necessary to increase service quality is not available or sustainable.
- To create access to scalability without the investment of time and capital expense necessary to develop that capability externally.
"There is no doubt that cost is a significant factor in any outsourcing arrangement," said Ms Cohen. "However, organisations need to take a longer term view of what an outsourcing relationship can accomplish for their operations overall."
