Calculate true outsourcing gains

Initial hype may hide the long-term costs and risks

Initial hype may hide the long-term costs and risks.

Research conducted by Meta Group found that for 53% of respondents the primary reason for outsourcing application development and maintenance projects was cost reduction.

Yet surprisingly, 28% of firms were unable to quantify the cost savings they expected and 48% expected cost savings of less than 20%. Compare these figures with the hype surrounding outsourcing and it would seem that something is amiss.

The problem is that organisations become blinkered by the short-term cost savings of outsourcing and often neglect the longer term implications. Measuring and understanding risk is critical when considering offshore outsourcing. If businesses are not careful they could end up with an application that does not meet initial requirements in terms of quality, performance and functionality.

Organisations need to think about whether short-term cost cutting should be the main reason for outsourcing application development and maintenance. Successful application development and maintenance outsourcing requires that organisations understand, register and mitigate associated risks and challenges.

Organisations must also take into account the fact that cost is not a one-way street and there are additional costs that organisations must bear when outsourcing. Of the respondents taking part in the Meta research, 80% suffered problems ranging from time and cost overruns to non-adherence to specifications and requirements.

Firms need to think about how outsourcing will work in practice. For example, they need to consider different business standards and processes, varying levels of skills and any cultural mismatch between businesses.

If companies do not give these issues due consideration they run the risk of the short-term cost savings becoming eroded in the longer-term. Businesses must quantify the short-term savings and analyse these in relation to the longer-term costs to get a true picture of the benefits of outsourcing.

These issues can make managing outsourcing relationships challenging and time-consuming. Typically, maintenance accounts for 80% of the cost of an application to business, and development accounts for the other 20%.

In-house teams generally need to make regular changes to applications. If the outsourced application has not been developed to the organisation's standards and there is little documentation, short-term cost savings will be wiped out with long-term maintenance costs increasing dramatically.

It is therefore important that your staff have the skills to manage the outsourcing relationship if projects are going to be successfully completed and the true cost savings are to be realised.

Outsourcing can be beneficial, and quite rightly businesses are striving to reap the rewards. However, they will not be successful unless they consider the risks as well as the rewards and put in place procedures and processes to mitigate these risks.

Mike Lucas is regional technology manager at Compuware

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