Examining External Services Providers

Gartner recommends working with independent advisory firm when transitioning IT services to an ESP

Stamford, CN — May 14, 2003 — As enterprises look to move from internal to outsourced IT service delivery, the cost associated with conducting a formal evaluation and making the transition to an external service provider (ESP) can be high, according to the analyst firm Gartner Inc.

In fact, the firm added, the total cost of the first step in this process, evaluation and selection of an ESP generally ranges from 2 to 5 percent of the projected annual price of the outsourcing deal.

"While there are substantial costs involved in moving to outsourcing IT service delivery, they pale in comparison to the overall annual value of the deal," said Richard Matlus, research director for Gartner's sourcing group. "Making the investment required to get it right the first time is clearly minor compared to the risks and costs associated with a sub-optimal deal."

To reduce the risk and costs of sub-optimal choices and deals, Gartner analysts recommended that an enterprise hire an external, independent advisory firm to assist with the initiative. An experienced advisor can expedite the process, provide better quality results in the ESP selection and improve the odds of a successful deal, according to the firm.

Typical costs for full advisory support through the vendor selection and contract negotiation phases range from 1 to 2.5 percent of the annual cost of the deal.

"By leveraging the expertise of an experienced advisor, it is likely that the internal staff costs and the external legal fees can be cut by as much as half because of templates, tools and methods that speed up the process," said Michael Andersen, vice president for Gartner Consulting's strategic sourcing solutions group. "Even if the investment in an advisor is at the high end of the range, the net cost is basically the same."

Gartner analysts said the transition to an ESP also drives cost, and a big driver is the transfer of hardware and software. Deals that are technology-intensive tend to be much higher in transition costs than those that are not. In a data center deal, for example, transition costs can range from 5 to 15 percent of the annual deal value. However, the transition costs in a less technology-intensive deal, such as help desk, are in a lower range from 2 to 5 percent of the annual deal value because there is little in the way of capital assets or software transfer involved.

"Transition elements are another example of where an advisor is key. Third-party verification and validation on transition planning and management can reduce the risk of unplanned timing and cost issues," Matlus said.

Additional information is available in the Gartner report "Weigh the Costs of Moving to Outsourced Service Delivery." The report examines the costs associated with moving from internal to outsourced IT service delivery.