IT Outsourcing Not Always a Cost-saver

Companies often neglect to factor in all costs associated with managing outsourcing engagements, Gartner's people3 reports

Companies often neglect to factor in all costs associated with managing outsourcing engagements, Gartner's people3 reports

Bridgewater, NJ  November 18, 2003  Many companies are outsourcing their information technology (IT) functions in an effort to lower costs, but not all of those companies are attaining the cost savings they expected, according to a recent survey conducted by people3, a unit of technology consultancy Gartner.

Only 21.1 percent of companies reported a cost savings greater than 20 percent as a result of their IT outsourcing efforts, people3 notes in its new report, "Embarking on a Successful IT Outsourcing Journey: Refocusing Your Human Capital Management Strategy." Conversely, 18.4 percent of companies did not achieve any cost reductions, while 9.2 percent experienced an increase in costs from their IT outsourcing contracts.

"There's an assumption by many companies that they can save a large percentage of their budgets by outsourcing some or all of their IT capabilities," said Lily Mok, a senior consultant at people3. "However, the true savings are not always as promising as one would expect."

Mok said that many companies often neglect to factor in all costs associated with managing the outsourcing engagements. Those costs can average 4.5 percent of the total contract value and can be as high as 15 percent.

Part of the problem, people3 reports, is that those additional costs can be difficult to quantify. Examples of factors relating to additional costs include time and effort spent during the transition period (on knowledge transfer, addressing cultural differences, putting infrastructure in place), disruption in the current work processes, increased turnover of IT employees who possess critical IT knowledge and skills, lost productivity and lowered employee morale.

All those factors can erode and even exceed the potential cost savings from the outsourcing efforts, according to people3.

"Companies are often unsuccessful in their outsourcing efforts because they overlook the human capital implications of IT outsourcing and do not have a robust, step-by-step action plan to address those issues," said Mok. "Our outsourcing survey results reveal that only 39.5 percent of companies have a human resource action and change management plan to support a smooth transition and execution of the outsourcing strategy."

The report details the key human capital infrastructure and processes that are required for a successful IT outsourcing initiative, including:

  1. An IT human capital strategy that is integrated and aligned with the IT sourcing strategy.

  2. The establishment and implementation of a robust communications plan.

  3. An optimal design for the retained organization that is equipped with streamlined work processes and jobs and roles necessary for the success of outsourcing.

  4. The identification, development and retention of critical skills and competencies for the retained organization.
But even when a company has those processes covered, proper expectation-setting is crucial to avoiding disappointment down the road. "It is important to set reasonable goals and expectations regarding the benefits that could be achieved through IT outsourcing," Mok concluded.