News Review: Gartner Report on Out-Sourcing
Outsourcing Doesn't Cut Costs Says Gartner. It doesn't take an Economics Degree to work that out...
Does Outsourcing really Pay (unless you are the Outsourcer) ?
More than one person has made the comment that if you Outsource your IT to a Commerical organisation, how can you expect to pay less for it?
It doesn't need a degree in Economics (although I have one, just in case you ask) to see that only by implementing efficiencies can an Outsourcer and the Client really build a win-win situation.
But if that's the case, surely these efficiencies could be gained without Outsourcing... Or can they?
Now, to add fuel to the fire, none other than Gartner have finally got out the pocket calculator, and decided that " outsourcing, and even offshore outsourcing, does not generally deliver overall cost-reduction ". I could have told them that years ago.
This is all the more relevant when you realise that Cost Reductions are the main reason cited by Companies for Outsourcing in the first place.
Why Outsource - Theory
From my perspective, I can see a number of theoretical reasons why a company may chose to outsource their IT. I am primarily interested in outsourcing Infrastructure, although it should be pointed out that the Gartner Report also covers IT Development.
- Reduction of costs. In theory, by allowing another company to get a grip of the organisation, costs can be reduced.
- Simplicity of process. By "chinese walling" part of the organisation, the process interface is clarified. This enables improved control over activities, and improves responsiveness.
- Access to intellectual capital. This is a big possible gain - by making use of an outside organisation, you can leverage their best practices, processes, technologies etc., and increase efficiencies.
Why Outsource - Practice
Looking at each of the theoretical benefits, above, my assessment is that these are not always achieved in practice:
- The implication from the cost-cutting argument is that the "Parent" organisation had not been able to get to grips with cost control. True, new management may be able to do this better. However, this is more a reflection of management problems, than a justification per-se for Out-Sourcing.
- Gartner's comment is "The idea of outsourcing to save costs year after year after year is a fallacy. Clients should not outsource to save money as it does not work. You should outsource to get predictable, reliable budgeting and greater cost control."
- The problem with attempting to simplify the processes is that you have created a completely new company, which, in turn, has it's own business objectives, and which needs to be managed. Supplier Relationships take up a lot of IT time. With Outsourcing, you have to invest a lot of time into the Customer/Client relationship.
- In the past, things were done via informal country lanes and well-trodden paths of informal relationships. Replace this with an OutSourced organisation, and you have to build a huge 8-lane superhighway of relationships, and ensure all traffic is routed through it.
- Access to intellectual capital is always possible, but rarely free.
- It is a mistake to believe that the only way you will get access to top-level management consultancy services, or technical infrastructure for Utility Computing, is by getting the company to Out-Source for you.
Final Comments
Having said all the above, there may be one valid reason for Out-Sourcing, which was referred to by the Gartner Report. This centres around what Gartner calls "The mass customization of IT services", or the "factory environment".
Basically, the argument is that by building a standardised, off-the-shelf utility model, the Outsourcing company can achieve real economies of scale.
In future, instead of the current habit of each client having a unique solution, Outsourcers will replicate a standard service, with a standard price-tag. So whichever organisation you visit, if IBM are the Outsourcer, you will see exactly the same services, processes, technologies, and interfaces. An impossible dream ? Maybe. It will certainly require changes of attitude, from both the Client and the Outsourcer.
It's Outsourcing, but not as we currently know it.
Reviewed by Dennis Adams in May 2004