IT outsourcing analysis: eight difference comparisons between the ideal and the reality

Most IT managers hope to save time and costs, improve operational efficiency by outsourcing. But they also need to avoid some risks while practicing management and controlling.

Most of the information managers have outsourced some IT functions, or at least have seriously considered it. For most businesses, IT outsourcing is more meaningful in financial aspect, especially when cutting costs is the primary purpose. But is the traditional concept correct? Let's take a look at some deficiencies of the traditional ideas and make a comparison with the practices in the real business world.

Comparison 1: The outsourcing business scope

Traditional thinking: the good outsourcing means to outsource non-competitive fields of the business or the business that the staff are not willing to handle.

Reality: a research shows that the preferred outsourcing field is application development, because it is very complex and time-wasting for companies to do by themselves, while many foreign and domestic outsourcing buyers do very well in this field. It also brings more flexibility, for the development work could be finished by outsourcing service provider effectively which otherwise will take years for their own employees to do so.

Comparison 2: the significance of outsourcing

Traditional thinking: the IT departments can save time and money by outsourcing.

Reality: Time and money are the main reasons for most managers to seek outsourcing vendors; however, often they cannot get what they want. Well, if you cannot cut costs significantly, what's your expectation from outsourcing?

● Focus on the core competitiveness.
● Implement the project faster.
● Without employment, or training, it can get new skills and the most advanced technology.
● Experience: outsourcing vendors might have successfully solved the thorny problems facing your staff.
● Low investment costs: outsourcing vendors can get part of the infrastructure ownership and administrative rights from you.
● Supplementary support: outsourcing vendors can transfer the scale economies to your organizations.
● Control of operating costs: outsourcing vendors have clearly shown the costs in the agreement, which removes the element of speculation.
● The improved service and support provided to customers, business partners and internal users.

Comparison 3: the analysis of outsourcing costs

Traditional thinking: outsourcing is feasible, because having a special skilled outsourcer to handle a project, is cheaper than employing or training staff.

Reality: outsourcing is not only for cost-savings. Both sides will have some differences in the calculation of the cost: in order to win contracts, outsourcing vendors often exaggerated the cost-cutting potential, and the outsourcing buyers often neglect some additional costs.

We need to fully consider the following points when analyzing the costs vs. benefits:

Employment: reduce the high cost of recruiting new employees.

Efficiency: outsourcing vendors can exploit economy of scale to achieve the cost savings that your company may not be able to achieve.

Training: a network research shows that to catch up with the most advanced Cisco router changes applied in major network systems, 5,000 US dollars will be spent per person per year and this expenditure can be saved through outsourcing.

Multi-vendors: it is similar with training, because the more suppliers, the more types of technology you will have, and the staffing costs will be higher.

Comparison 4: flexibility of outsourcing contract

Traditional thinking: make a careful decision, because once you signed the contract, you cannot return to the original situation.

Reality: Most contracts contain the provisions to end the contract, or the life of the contract is short enough to allow dissatisfied customers get back certain functions with the periodic review. And the situation and demand can be changed; the IT budgets also can be increased, which make the outsourcing feasible.

Based on a dynamic period, you can make a regular assessment of the outsourcing vendors; following are the questions you can ask:

● Did the vendors act in accordance with commitments?
● Whether the contract is cost-effective?
● Whether outsourcing occupies more management time than expected, or that you can save?
● What about your IT budget and business prospect?

Whether outsourcing triggers the issue of employee confidence?

Comparison 5: improving the efficiency of outsourcing

Traditional thinking: many companies think outsourcing is worthy as it brings much profit, so it should be considered as a viable tool when necessary.

Reality: This idea is largely correct, but, unfortunately, most managers do not think it is the whole fact.

Rainer Mueller, an IT manager, said, "Sometimes, after the completion of the contract, something goes wrong, but we cannot call the vendors back, so we could only ask other people to solve the problems," But generally speaking, based on his experience, outsourcing is profitable.

How to increase the probability of success?

● When working together with the outsourcing vendors, do not just tell them what to do, and then slip away.
● Make a regular evaluation of services agreement to ensure they are still in accordance with your goals and expectations.
● Do not care about the profits too much.

Comparison 6: outsourcing relationship

Traditional thinking: nothing will go wrong; we get a "steel solid” contract.

Reality: Dun & Bradstreet find from its recent survey that about 25% of the outsourcing relationships rupture within two years, and half rupture in five years. One of the main reasons is that many outsourcing vendors can not fully realize what they were required to do when they were employed.

So, how to avoid such a situation?

● A requirements assessment is needed before outsourcing.
● Make sure that the demands are clearly expressed in contract.
● Make an agreement of service quality; define the business, the price of each service, expected results, performance standards and punitive measures for not reaching the goal.
● Make a regular assessment of performance.
● Add the operational objectives to the service quality agreement, which makes vendors understand your priority needs.
● Considering of signing a wage rate contract that can be changed with the level of satisfaction, which is an incentive for the vendors.

Comparison 7: make a assessment of outsourcing vendors

Traditional thinking: the contract looks good, so we are very confident to cooperate well with this company.

Reality: Do not rush to do anything. If you want to have a perfect outcome, then you should spend more time and energy to evaluate your future partners.

Defining the life of the contract, service quality agreements and performance assurance should be top considerations for the technical staff to negotiate with outsourcing vendors. Something should be assessed before signing the contract, including: the level of familiarity with your industry, the management skills of vendors; the staff to be assigned to the project team; and technical expertise (The vendors may have good staff, but did they gain access to the latest training and skills?).

Comparison 8: participators in outsourcing decision-making

Traditional thinking: Only the top IT managers have the right to make decisions on whether to outsource.

Reality: From an IT perspective, outsourcing may be a tactical decision, but as it will affect corporate strategy, both of the two viewpoints should be presented in the decision-making level.

All shareholders should be involved; many departments in companies are likely to rely on the forthcoming outsourced functions, so it should be under consideration. Moreover, consider all the advantages and shortcomings. Outsourcing may save money, but the other factors, such as the impact on customers, are more important than the cost-saving consideration.

To be successful, outsourcing must be a win-win strategy; hiring outsourcing vendors should bring profits to the organization. Before starting the process, you should do a further cost - benefit analysis. If the results are dependable, then outsourcing should be considered.