04
Mon, Nov
1 New Articles

Are Outsourcing Cost-Savings Estimates Misleading?

Commentary
Typography
  • Smaller Small Medium Big Bigger
  • Default Helvetica Segoe Georgia Times

META Group is now warning of a substantial political risk for executives who assume that their companies will achieve a 40% savings by outsourcing IT services and development. Such savings are not real, says META. In fact, the savings are more likely to be in the 15-20% bracket.

This misleading presumption by many IT executives is based upon the idea that a company can replace, one for one, the efficiencies of an in-house programmer or stateside consultant with a less-expensive outsourcing developer and then pocket the difference. For instance, the cost of a full-time equivalent programmer in India is 60% of the cost of a stateside equivalent.

Factors That Drive Up Costs

However, according to META, there are a number of factors that will drive up costs, impact security, and create requirements that must be absorbed by the corporation.

"A common oversight for IT organizations is a contingency plan--what happens if the vendor, all best intentions and contracts aside, simply fails to deliver. Though this scenario may be unlikely, the IT organization must assess the implications of vendor failure," says Dean Davison, META Group vice president. "High risk or exposure might deter the organization from outsourcing, it might shift the outsourcing strategy, or it might drive the company toward outsourcing. The results of risk analysis vary among companies; it is the process of risk analysis that is paramount."

There are a number of other factors that companies must consider in outsourcing development or projects:

  • Security--The risk of security breaches or loss of intellectual property protection is inherently raised when working in international business. Privacy concerns must be addressed.
  • Scope Creep--According to META, there is no such thing as a "fixed-price contract." Most outsourcing projects change by up to 15% during the development cycle.
  • Culture--Many leading outsourcing vendors have cultural education programs, but executives should not assume that cultural alignment will be insignificant or trivial.
  • Knowledge Transfer--The time and effort to transfer knowledge to the vendor is a cost rarely accounted for by the IT organization, according to META. They observe that IT organizations experiencing a 20% decline in productivity during the first year of an agreement, largely due to time spent transferring technical and business knowledge to the vendor.

Outsourcing Will Still Grow in Importance

Despite these obstacles, META estimates that outsourcing, as an industry, will grow 20-25 % over the next two years, and the largest part of that sector will probably be headed overseas to developing countries where personnel costs are lowest.

This is a somber prediction for developers here in the states, where the IT recession that started in 2000 continues to eat away at technology jobs and consulting portfolios. According to Matthew Slaughter, associate professor of business administration at Dartmouth College, the movement toward outsourcing IT jobs will progress at a much faster rate than for jobs in other sectors, such as manufacturing. "[IT work] will move faster because it's easier to ship work across phone lines and put consultants on airplanes than it is to ship bulky raw materials across borders and build factories and deal with tariffs and transportation." By the end of 2004, Gartner Group estimates, one in 10 IT jobs at U.S. IT companies and one in 20 at non-IT companies will move offshore.

Outsourcing as a Trend in Political Posturing

It's not surprising, then, that outsourcing has become one of the hottest political issues facing candidates in the upcoming presidential election. All of the major Democratic candidates have a position on the economic cost to U.S. jobs when companies outsource, and indeed, the debate about outsourcing generally is not an IT-specific issue. Meanwhile, diverse stories about corruption in outsourcing continue to fill the news: the assignment by the U.S. government of outsourcing contracts to rebuild Iraq; the outsourcing contracts with undocumented workers to provide Wal-Mart janitorial services. The common thread to all of these stories is that organizations do not want to shoulder the expense of providing jobs for services that are outside their "core competencies."

Value-Add IT

The main question remains: If outsourcing is to become a key element of doing business in a global economy, how can IT sustain its standing within an organization? What is the "value-add" that IT provides within an organization?

The technological advances made within IT during the late 1990s continually fragmented the overall business knowledge that IT professionals were employing in their jobs: Packaged systems, object-oriented programming technologies, and a focus upon "technical skills" rather than project management and corporate business goals have divested many IT managers of the values that once made a strategic difference to their organizations. At one time, an IT organization was a reflection of the business culture that drove the organization. Today, IT is often a reflection of the corporations that created the business software and hardware packages that run the client organizations.

And, unfortunately, when IT thinks strategically today, it is thinking of technological advances in the IT industry; it would be hard-pressed to pinpoint how those advances can be manifested in the corporations that actually employ them. Indeed, IT's knowledge has become compartmentalized and wholly technical, while the business challenges faced by their parent companies are of a different category entirely--global in scope, competitive to the bottom line, and accountable to fluctuations of the stock market.

Is it any wonder then that, when faced with the prospect of saving money by outsourcing IT development, CFOs quickly latch onto this potential? When was the last time IT really contributed to the bottom line?

IBM's On Demand Strategies Feed the Trend

Last, but not least, IBM's own On Demand strategies within the IT industry continue to stress the need for organizations to focus upon their core competencies, shoving non-core services out to the global marketplace.

In nearly every area where IT has traditionally interfaced with IBM products in the past, the IBM Corporation has positioned its Global Services Division to compete directly with internal IT services to complement or replace their functionality. In fact, most outsourcing organizations are modeling themselves after the success of IBM Global Services, going over the heads of IT directly to the financial controllers of larger corporations and offering them opportunities that are difficult to resist. Little heed to the long-term viability of those services, in relation to the overall strategic goals of the company, is given. Often such services are presented simply as "cost-containment" strategies that CFOs leverage into wholesale outsourcing projects. Like the nose of the camel under the tent, once companies begin divesting themselves of their IT expertise, it's difficult to stop the process.

META Group's Warnings

META Group's warnings against those proclaimed cost-savings may offer a bit of relief to besieged IT organizations. Instead of focusing merely upon cost savings, META is revealing the hidden cost factors inherent in any outsourcing endeavor.

And if IT is really to become an On Demand outsourced service, as pundits are predicting, then corporations will soon be faced with a new set of challenges: how to reclaim their technical preeminence within IT to sustain their core competencies once they've lost their technical and business skills to service organizations. The trend toward outsourcing will reverse when companies again realize that innovation within their own industry is based upon both business savvy and technical talent.

Thomas M. Stockwell is Editor in Chief of MC Press, LP.

Thomas Stockwell

Thomas M. Stockwell is an independent IT analyst and writer. He is the former Editor in Chief of MC Press Online and Midrange Computing magazine and has over 20 years of experience as a programmer, systems engineer, IT director, industry analyst, author, speaker, consultant, and editor.  

 

Tom works from his home in the Napa Valley in California. He can be reached at ITincendiary.com.

 

 

BLOG COMMENTS POWERED BY DISQUS

LATEST COMMENTS

Support MC Press Online

$

Book Reviews

Resource Center

  • SB Profound WC 5536 Have you been wondering about Node.js? Our free Node.js Webinar Series takes you from total beginner to creating a fully-functional IBM i Node.js business application. You can find Part 1 here. In Part 2 of our free Node.js Webinar Series, Brian May teaches you the different tooling options available for writing code, debugging, and using Git for version control. Brian will briefly discuss the different tools available, and demonstrate his preferred setup for Node development on IBM i or any platform. Attend this webinar to learn:

  • SB Profound WP 5539More than ever, there is a demand for IT to deliver innovation. Your IBM i has been an essential part of your business operations for years. However, your organization may struggle to maintain the current system and implement new projects. The thousands of customers we've worked with and surveyed state that expectations regarding the digital footprint and vision of the company are not aligned with the current IT environment.

  • SB HelpSystems ROBOT Generic IBM announced the E1080 servers using the latest Power10 processor in September 2021. The most powerful processor from IBM to date, Power10 is designed to handle the demands of doing business in today’s high-tech atmosphere, including running cloud applications, supporting big data, and managing AI workloads. But what does Power10 mean for your data center? In this recorded webinar, IBMers Dan Sundt and Dylan Boday join IBM Power Champion Tom Huntington for a discussion on why Power10 technology is the right strategic investment if you run IBM i, AIX, or Linux. In this action-packed hour, Tom will share trends from the IBM i and AIX user communities while Dan and Dylan dive into the tech specs for key hardware, including:

  • Magic MarkTRY the one package that solves all your document design and printing challenges on all your platforms. Produce bar code labels, electronic forms, ad hoc reports, and RFID tags – without programming! MarkMagic is the only document design and print solution that combines report writing, WYSIWYG label and forms design, and conditional printing in one integrated product. Make sure your data survives when catastrophe hits. Request your trial now!  Request Now.

  • SB HelpSystems ROBOT GenericForms of ransomware has been around for over 30 years, and with more and more organizations suffering attacks each year, it continues to endure. What has made ransomware such a durable threat and what is the best way to combat it? In order to prevent ransomware, organizations must first understand how it works.

  • SB HelpSystems ROBOT GenericIT security is a top priority for businesses around the world, but most IBM i pros don’t know where to begin—and most cybersecurity experts don’t know IBM i. In this session, Robin Tatam explores the business impact of lax IBM i security, the top vulnerabilities putting IBM i at risk, and the steps you can take to protect your organization. If you’re looking to avoid unexpected downtime or corrupted data, you don’t want to miss this session.

  • SB HelpSystems ROBOT GenericCan you trust all of your users all of the time? A typical end user receives 16 malicious emails each month, but only 17 percent of these phishing campaigns are reported to IT. Once an attack is underway, most organizations won’t discover the breach until six months later. A staggering amount of damage can occur in that time. Despite these risks, 93 percent of organizations are leaving their IBM i systems vulnerable to cybercrime. In this on-demand webinar, IBM i security experts Robin Tatam and Sandi Moore will reveal:

  • FORTRA Disaster protection is vital to every business. Yet, it often consists of patched together procedures that are prone to error. From automatic backups to data encryption to media management, Robot automates the routine (yet often complex) tasks of iSeries backup and recovery, saving you time and money and making the process safer and more reliable. Automate your backups with the Robot Backup and Recovery Solution. Key features include:

  • FORTRAManaging messages on your IBM i can be more than a full-time job if you have to do it manually. Messages need a response and resources must be monitored—often over multiple systems and across platforms. How can you be sure you won’t miss important system events? Automate your message center with the Robot Message Management Solution. Key features include:

  • FORTRAThe thought of printing, distributing, and storing iSeries reports manually may reduce you to tears. Paper and labor costs associated with report generation can spiral out of control. Mountains of paper threaten to swamp your files. Robot automates report bursting, distribution, bundling, and archiving, and offers secure, selective online report viewing. Manage your reports with the Robot Report Management Solution. Key features include:

  • FORTRAFor over 30 years, Robot has been a leader in systems management for IBM i. With batch job creation and scheduling at its core, the Robot Job Scheduling Solution reduces the opportunity for human error and helps you maintain service levels, automating even the biggest, most complex runbooks. Manage your job schedule with the Robot Job Scheduling Solution. Key features include:

  • LANSA Business users want new applications now. Market and regulatory pressures require faster application updates and delivery into production. Your IBM i developers may be approaching retirement, and you see no sure way to fill their positions with experienced developers. In addition, you may be caught between maintaining your existing applications and the uncertainty of moving to something new.

  • LANSAWhen it comes to creating your business applications, there are hundreds of coding platforms and programming languages to choose from. These options range from very complex traditional programming languages to Low-Code platforms where sometimes no traditional coding experience is needed. Download our whitepaper, The Power of Writing Code in a Low-Code Solution, and:

  • LANSASupply Chain is becoming increasingly complex and unpredictable. From raw materials for manufacturing to food supply chains, the journey from source to production to delivery to consumers is marred with inefficiencies, manual processes, shortages, recalls, counterfeits, and scandals. In this webinar, we discuss how:

  • The MC Resource Centers bring you the widest selection of white papers, trial software, and on-demand webcasts for you to choose from. >> Review the list of White Papers, Trial Software or On-Demand Webcast at the MC Press Resource Center. >> Add the items to yru Cart and complet he checkout process and submit

  • Profound Logic Have you been wondering about Node.js? Our free Node.js Webinar Series takes you from total beginner to creating a fully-functional IBM i Node.js business application.

  • SB Profound WC 5536Join us for this hour-long webcast that will explore:

  • Fortra IT managers hoping to find new IBM i talent are discovering that the pool of experienced RPG programmers and operators or administrators with intimate knowledge of the operating system and the applications that run on it is small. This begs the question: How will you manage the platform that supports such a big part of your business? This guide offers strategies and software suggestions to help you plan IT staffing and resources and smooth the transition after your AS/400 talent retires. Read on to learn: