CIOs face outsourcing dilemma as recession approaches

CIOs have to juggle two schools of thought inoutsourcingthat are poles apart. They have to consider whetherthey simply want to cut costsor use outsourcing in an innovative way to benefit their business.

With recession looming, industry observers believe businesses will increasingly shy away from large transformational outsourcing projects and return to outsourcing as a way to reduce fixed costs.

But CIOs could be caught in a dilemma as they weigh up how to balance pressure from the board to save money, with longer-term goals to meet the needs of the business.

"No doubt the main boards will put pressure on them to cut costs but they need to make short-term tactical decisions that keep the long-term strategy going in the right direction," says Bob Scott, sales director at Capgemini.

He says outsourcing contracts have changed over the years to encourage innovation. They will have to change again to focus on savings while maintaining innovation.

Robert Morgan, director at consultancy Hamilton Bailey, which advises outsourcers, says businesses are demanding outsourcing contracts that will help them cut costs.

But he warns CIOs must be disciplined in the face of boardroom pressure.

"They must not think about the costs savings first but the relationship with the supplier. You must understand the culture of the supplier, whether it can innovate and where you fit into its ecosystem."

If you get the supplier right you can achieve savings while helping the business progress, he says.

Multisourcing, for example, may be a good way of ensuring suppliers differentiate, but it is not the best approach if you want cut costs first and foremost, says Morgan.

"If you use multisourcing you have to allocate 6% of your total budget just to interface with and manage the suppliers."

Phil Morris, European managing director at sourcing consultancy Equaterra, says his clients are delaying projects in the wake of financial uncertainty.

"They are putting strategic plans on hold rather than abandoning them. This is to ensure they keep cash in the business," he says.

The latest figures from researcher TPI confirm that companies have put outsourcing contracts on hold while they assess the impact of the downturn.

Businesses across the Europe, the Middle East and Africa, signed only 56 contracts totalling about €4.4bn in the third quarter this year compared to 75 contracts totalling €14.8bn in the previous three months.

"This was the weakest quarter for total contract value of outsourcing deals in the past six years," says TPI.

But businesses are not abandoning outsourcing. TPI expects outsourcing deals to accelerate by the end of the year. The value of new outsourcing contracts in 2008 is likely to exceed the €68bn total of 2007.

"Take up in the summer was slower because people have waited to see what develops, but we are now seeing a pick up," says Morris at Equaterra.