Firms causing problems for themselves by outsourcing on cost alone

Companies that outsource services purely to cut costs are likely to set themselves up for short-term gains and long-term criticisms from management., says Gartner report

Cost still remains the primary factor when organisations enter into outsourcing relationships, which can cause problems in the future, says analyst firm Gartner.

Companies that outsource services purely to cut costs are likely to set themselves up for short-term gains and long-term criticisms from management.

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, an 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," she said.

Cohen said that some long-term infrastructure outsourcing contracts that were signed three or four years ago could 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," Cohen said.

"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," she added.

Cohen advised any organisation considering outsourcing an IT function to 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 five major, realistic goals for outsourcing are:

To control cost over time.

To provide access to highly-skilled technical staff as needed.

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.

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.

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