I.T. Outsourcing: Expect the UnexpectedBy Allan Alter | Posted 03-07-2007
I.T. Outsourcing: Expect the Unexpected
Outsourcing may be commonplace, but it continues to confound IT executives' expectations. Take the common myth that companies outsource to save money. Not only is this not true in half the cases, but our survey shows that most companies aren't saving money by outsourcing.
And that's not the only surprise: Insourcing and outsourcing, though polar opposites, are both on the rise. Companies spend more on offshore vendors than domestic ones, despite problems with quality and delivering return on investment. Dissatisfaction with outsourcing vendors is widespread, yet most of the 401 IT executives who took our survey blame their own companies most of all for the disappointing performance of their vendors. Though outsourcing is directly responsible for layoffs, it's not as disruptive as it was last year.
Should our findings cause concern? After all, no more than 29 percent say they are dissatisfied with any of the 11 outsourcing activities we tracked. Still, our research suggests that outsourcing is providing less value than it should due to mediocre management by outsourcing customers and poor performance by vendors. That explains why satisfaction with outsourcing is lukewarm and not enthusiastic. But there's a silver lining: If outsourcing isn't saving money, it also could mean CIOs are efficiently running their IT organizations.In this story:
Findings: OutsourcingAnd InsourcingAre On The Rise
Methodology: How the Survey was Conducted
Outsourcing, Offshoring, Insourcing on the Rise
Outsourcing and insourcing aren't mutually exclusive. Outsourcing is commonplace and growing: 81 percent of companies outsource at least one IT activity, and these organizations are devoting a larger share of their IT budgets to these services than they did in 2005. Much of that increase is in offshore outsourcing; for the first time, companies that use offshore and domestic outsourcers are spending more on offshore vendors than domestic ones. While outsourcing is on the rise, far more companies are insourcing, toothe opposite of what might be expected. Why are outsourcing and insourcing going up at the same time? Among the reasons: Most IT executives feel they are successful at outsourcing, so few bring all IT activities back in-house. Also, the most frequently outsourced IT activitiessystems development and integrationtend to hire outside talent as projects scale up and cut back as they scale down. But there are other reasons, as later findings suggest.
Outsourcing Is Not a Money Saver
The exception: Offshore outsourcers help large companies cut costs. Most IT executives think outsourcing is overrated as a cost-cutting strategy. That's certainly true in regard to domestic outsourcing: It usually costs more to use a domestic outsourcer than it is to perform the same work in-house. Even offshore outsourcers fail to save money for their smaller clients much of the time. That means most large companiesand many small companiesare often disappointed when they aim to save money by outsourcing. When IT executives do consider their companies to be successful at outsourcing, it's usually because they are achieving other important benefits, such as freeing up management time.
IT Executives Like Outsourcing; It's the Outsourcers They Can't Stand
Hiring domestic outsourcers works out more often than using offshore firms. IT executives aren't jumping for joy, but most are satisfied with outsourcing the 11 IT activities we tracked. In fact, fewer respondents say they're dissatisfied than in last year's survey. That's consistent with the high outsourcing success rate we reported in the introduction, and undoubtedly is helping spur the growth of outsourcing. Yet domestic and offshore outsourcers, in general, get very mediocre grades for value and service. What's more, only 31 percent say offshore outsourcers do a better job than domestic firms. Our respondents consider offshore outsourcing vendors worse than domestic ones. Undoubtedly, poor performance is causing companies to insource work.
Mismanagement Causes Most Outsourcing Problems
Outsourcing vendors do a better job when IT executives know how to manage them. IT executives are dissatisfied with outsourcing vendors, but they concede the vendors aren't entirely at fault. The inability to effectively supervise vendors is the single biggest reason outsourcing fails. IT executives, especially at large companies, admit they must do a better job of managing and selecting vendors; close to half admit they lack effective management processes. At companies with management processes in place, satisfaction rates with outsourcing and vendors increase by as much as 26 percentage points. Educating managers on how to manage outsourcing is clearly a priority for IT executives.
Fear of Outsourcing Is Down, But Not Out
Outsourcing means layoffs at over a third of companies. Fewer respondents than in 2006 say their IT organizations are being disrupted by worries about job losses from outsourcingeven at larger companies. It would be great to give the credit to better management, but there's little evidence that companies have gotten better at managing outsourcing. If the level of job-loss jitters has dropped, it's probably because the U.S. economy remains strong. What is notable, however, is that fear does remain a problem at large companies, and with good reason: On average, big firms eliminated 127 jobs due to offshoring in 2006. Most top offshoring destinationsIndia, China, Eastern Europe and the Philippinesoffer low IT wages, underscoring the fact that cost reduction is the main impetus for outsourcing.