To Outsource or Not To Outsource?

Most CIOs at some point have asked: Should I outsource this IT project? The answer can be surprisingly complex, depending on the reasons for considering such a move.

According to Gartner principal analyst Bruce Caldwell, savings achieved through outsourcing can be significant — in the 20 to 30 percent range. After all, outsourcing companies must perform tasks quickly and efficiently to make a profit. A corporation, on the other hand, is not a profit center, nor is it necessarily driven to quickness or efficiency.

However, outsourcing is not just about money. Greg Secord, a vice president at outsourcing heavyweight ADP, said that although most companies save 10 percent or more in their outsourcing endeavors, they also are seeking access to best practices.

“Outsourcing purely for financial reasons is not the best bet,” Secord told the E-Commerce Times. “You need to be comfortable in yourability to develop a relationship with an outsourcing firm, and trust that their best-practice methodology is proven.”

He added that a primary reason companies choose to outsource functions is because they do not have or cannot attract the people skills they need. Outsourcing gives companies access to a much greater pool of skills.

“Additionally, companies often would rather invest their time [in] developing ways to make a difference, to distinguish [themselves] from their competition,” Gartner’s Caldwell told the E-Commerce Times. “They often outsource the management and maintenance of routine operations so they no longer have to worry about them.”

Harder Than It Looks

Even so, after nearly three decades of outsourcing, only about 20 percent of the world’s 500 largest companies are outsourcing most of their IT infrastructure, according to Caldwell. “Not everybody’s on this bandwagon,” he noted, “and there are still things that companies want to keep in-house because they are critical to their business and they need to know how to do them themselves.”

Also, there is a lot more to outsourcing than simply finding a vendor and signing a contract. Managing outsourcing contracts is a skill unto itself, Caldwell said, noting that if a company lacks a sourcing plan, a committee to oversee contracts or a philosophy that supports the outsourcing initiative, the project may be doomed.

“There’s a learning curve and a life cycle to outsourcing,” he explained, “and it can be expensive finding the right vendor, as well as going through the transition of taking your operations to that vendor. It can also be upsetting to your organization because employees know their jobs are going to be transferred to the vendor, or they may simply be laid off.”

No Job Too Small

However, these concerns are not stopping outsourcing in its tracks; to the contrary, it is catching on beyond the big-budget enterprise crowd. Even small businesses have begun to turn to outsourcers, which have expressed great interest in partnering with them.

According to Caldwell, small businesses often operate at a disadvantage because they may not have an IT department, nor the skills to manage one properly, although they still have the same business needs as a large company, including payroll, human resources, accounting and customer service. Outsourcing can make all of these services available to small companies and can provide them with access to the latest technologies.

On the downside, just like large enterprises, small businesses need outsourced services that are customized to their business requirements. “When it comes to smaller companies and smaller-size contracts, it becomes difficult for the outsourcing vendor to customize on a cost-effective basis,” Caldwell noted.

Additionally, he said, a lot of outsourcing contracts are based on relationships between companies, usually larger ones, rather than on marketing and advertising. In contrast, when dealing with small businesses, “it’s a more difficult sale. It’s more difficult for outsourcers to reach out to those smaller customers.”

IT Changes

Although growth in the outsourcing industry has slowed as a result of the generaleconomic malaise, several changes are helping to shore up the sector, according to Caldwell.

For starters, other IT services that have been even more battered by the downturn, such as consulting and development and integration, are increasingly becoming part of outsourcing contracts. Companies also are opting to turn over the entire process of developing new systems to outsourcers, which then deliver those systems as well as run and manage them. Additionally, business process outsourcing is growing at a faster clip than traditional outsourcing, and down the road, it will absorb the more traditional outsourcing opportunities that vendors now enjoy.

“There’s also been some disillusionment over the years about the ability of IT to deliver a competitive advantage and a return on investment,” Caldwell said. “Because of that, there’s been an increasing acceptance of packaged systems, like SAP or PeopleSoft, rather than designing all that from scratch. Although packaged systems can be verydifficult to implement and customize, it’s still less costly and less difficult than building from scratch.”

In Good Times and Bad

Companies also are beginning to accept the reality that they are not going to get all the bells and whistles they want, and that concessions must be made. “‘This is good enough’ has become more of a way of thinking at the corporate level right now,” Caldwell said, “rather than giving technology unlimited funds for building and answering all the requirements that a company may possibly want.”

He noted that both small and large enterprises are becoming more interested in application service providers (ASPs) and hosting companies. Rather than shouldering a large capital expenditure to purchase and install applications on their own systems, companies can rent applications or services from an outsourcer and pay only for the assets they need when they need them. This “on-demand” approach is attractive to businesses because it allows them to access the benefits of technology without requiring them to have the skills and capital to invest in those assets.

Caldwell added that outsourcing is one of those industries that can prosper in both good and bad economic times. “Because it can help cut costs and requirements for capital investment and cut headcount, [outsourcing] has a lot of appeal in a bad economy. And in a good economy, it has a lot of appeal because it can free up resources and turn employees to things of higher value and more interest, and those employees will stay on rather than go somewhere else in search of more challenging work.”

Looking Offshore

Thanks to a proliferation of high-bandwidth communications since early 2000, more companies have begun turning to overseas outsourcers in such countries as India. Caldwell noted that labor is much cheaper there, and the quality of deliverables is good. “Additionally, Indian companies are now looking at offering business process outsourcing and IT infrastructure services to expand their capabilities,” he said. “It’s becoming a way to save money on many of these services and processes, by going to a country with lower wages.”

One company taking advantage of this wage differential is Aetna. Company spokesperson Fred Laberge said that because Aetna’s cost structure is significantly higher than some of its competitors’, outsourcing is helping the company improve its bottom line.

Laberge told the E-Commerce Times that Aetna still does most of its IT work in-house withapproximately 2,500 employees, but the company augments that staff with about 400 offshoreworkers. “We believe that relying on offshore contractors is a very effective means of giving us the flexibility to ramp up for time-critical projects andscale back as the situation demands,” he explained. “It really saves us a lot of money.”

He said Aetna began increasing its use of offshore workers in the last year or two, largely because Indian outsourcing firms could provide highly skilled employees who to perform quality work at an effective price. An added benefit is that because of time zone differences, outsourced workers in India function as a second shift, handling many of the demands that arise during Aetna’s U.S. off-hours.

Minimal Downside

Laberge said there has been no significant downside to the outsourcing partnership with India. “I think it’s enabled Aetna to better serve our customers and the marketplace because it’s helped transform us to a more nimble organization. Really, the goal here isturnaround time for your customers. Their needs must be handled in the quickest, most cost-efficient way.”

He added that use of offshore vendors is a reality for many companies in today’s global economy. “In order for us to be competitive, we must have our needs met by the best source at the best price. Outsourcing has been an appropriate and effective way of reducing costs for Aetna while retaining most of our work in-house, where our highly skilled workers can really focus on improving systems.”

As more companies climb on the outsourcing bandwagon, U.S. IT workers will have to adapt to new realities, not all of which will be pleasant. CIOs probably will view the changes in a more positive light as lower costs translate into higher revenues, establishing IT as an efficient cog in the wheel of global enterprise. Those who are willing to strategize and consider outsourcing decisions not only in monetary terms, but also in terms of best practices, stand to gain a great deal as the outsourcing trend gathers steam.