Recognise the five IT outsourcing myths before committing yourself to a contract

Outsourcing is not simply about farming out all your IT to the cheapest suppliers - why assume that suppliers can run a business...

Outsourcing is not simply about farming out all your IT to the cheapest suppliers - why assume that suppliers can run a business more efficiently than you can with your own staff?

A firm can outsource any type of business process

IT assets and activities can take many different forms, but they can be categorised into critical differentiators, critical commodities or useful commodities.

A critical differentiator, such as the British Airways' reservation system, should be kept in-house. External resources should only be bought in when necessary and controlled by management.

A critical commodity, such as an aircraft maintenance system, gives an airline no competitive advantage but it is a minimum requirement to compete in the airline sector. These systems can be outsourced where supplier price and quality of performance compare favourably with the in-house option.

Useful commodities, such as datacentres or the payroll, are the most obvious targets for outsourcing.

Outsourcing is always the cheapest option

We once witnessed an unsolicited bid to a food and drinks conglomerate anxious to outsource its datacentres.

The suppliers' representative claimed his firm could maintain service levels and achieve 20% savings on a five-year contract, and said that a 10-year contract could achieve 30% cost savings. The claim was based on production and labour economies of scale, together with what was claimed as superior management practices inherent to a world-class IT supplier.

A three-hour look at the claim against the existing IT performance of the company revealed that it was large enough to achieve similar economies of scale itself, and that its IT management was actually very experienced.

Single-supplier, long-term deals are economical

The record on these sorts of deals has been very mixed. Lacity and Willcocks (2001) looked at 29 such deals and found that 38% met expectations, 35% were unsuccessful and 27% got mixed results. Deals such as this were made in the early 1990s - often by firms in financial trouble - and typically made to reduce costs.

Suppliers made a large initial outlays to buy users' assets and take over much of the IT headcount. The suppliers needed to recoup this investment and, as a result, sometimes user organisations felt exploited.

Outsourced suppliers can provide a better deal

Organisations usually outsource IT for a mixture of strategic, financial, political, technical and tactical reasons. However, evidence has suggested that cost savings are one of the most important expectations.

There is plenty of evidence that cost savings can be achieved, but there are limits as to the extent to which a supplier can achieve the "holy IT outsourcing trinity" - dramatic cost savings, a decent profit margin and higher service levels. There will be trade-offs: eg, cost savings might be achieved at the expense of degraded service levels, or a lack of technology investment.

Always take the cheapest quote for outsourcing

A natural instinct is to make sure you have a watertight contract. However, slim or no profit margins can drive a supplier to opportunistic behaviour, can harm your relationship with them and, ultimately, the business value of your IT performance.

Intelligent IT Outsourcing: Eight Building Blocks to Success, by Sara Cullen and Leslie Willocks, is part of the Computer Weekly professional series. To order, call 01865-888180

www.bh.com/computerweekly
This was last published in January 2004

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