By Andy McCue, 31 January 2008 14:23
NEWS
Outsourcing rarely achieves the attractive cost savings promised at the start of a deal and in many cases actually increases costs and has a negative impact on service.
That's the verdict of two-thirds of UK IT chiefs in silicon.com's CIO Jury 12-strong IT user panel, whose verdict is that outsourcing doesn't save money.
Nicholas Bellenberg, IT director at publisher Hachette Filipacchi UK, said outsourcing only usually saves money by reducing resource requirements, although benefits can include better experience and access to technical and management skills.
He said: "Outsourcing can increase costs significantly. There have been numerous recent examples of companies insourcing previously outsourced activities simply to save cost."
Mike Roberts, IT director at Harley Street private healthcare organisation The London Clinic, has worked on both sides of the outsourcing fence during his career and said suppliers use several tactics to ensure they make their 20 per cent profit target on the deal.
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These include including as much chargeable work as possible to offset service level agreement penalties and transferring the buyer's IT staff across and then charging them back at consulting rates.
He said: "On another occasion, a CFO was offered a 'fantastic saving' by a major global provider. When the details were reviewed by consultants with the relevant contract experience, the cost of the service increased."
Richard Steel, CIO at the London Borough of Newham, argued: "It depends how bad the service being outsourced is. I would contend that, too often, services are outsourced because services are failing - in which case they can be improved - often to only a mediocre level. As a generalisation it would be hard to save money - and maintain excellent service - in a well-run service."
And Ted Woodhouse, former IS director at Leeds Teaching Hospitals NHS Trust, said: "I have been in the IT business for 30 years, and I have never, ever, not even once, heard anyone ever say, 'my word, the IT service is a lot better since we outsourced it'. The question shouldn't be whether outsourcing saves money; the issue is whether you can afford the real costs of outsourcing."
But not everyone agrees with this damning assessment of the value of outsourcing - although these come with caveats.
Simon Crawshaw, IT and procurement director at Bourne Leisure, said: "As with anything, results are a direct result of effort put in. Lazy outsourcing will not deliver savings as it will simply allow a supplier to abuse the relationship. Selective outsourcing when well specified and managed can deliver huge savings."
Kevin Fitzpatrick, European CIO at Sodexho, warned: "It is crucial that real current costs and new vendor charges are fully understood. Poor knowledge of today's environment and poor estimating of future model often leads to disappointment."
One organisation that has cut costs through outsourcing is Vocalink. Nick Masterson-Jones, IT director at Vocalink, said: "We have focused on outsourcing work packages to trusted partners and we have achieved significant cost-savings by doing so. By retaining accountability in-house and by keeping the scope of the packages tightly controlled, we have managed to avoid some of the pitfalls that make the front pages of the computer press."
The academic sector isn't known for major use of outsourcing but the drive towards shared services is set to change that.
Paul Hopkins, IT director at the University of Newcastle, said: "In the university sector, we do not have any significant outsourcing (yet) but our 'bottom-up' approach to shared services will bring more outsourcing. Initially we are outsourcing certain activities to other universities but we are starting to engage with the major vendors to examine some potentially huge deals across our sector."
Today's CIO Jury wasÂ…
Alastair Behenna, CIO, Harvey Nash
Nicholas Bellenberg, IT director, Hachette Filipacchi UK
Simon Crawshaw, IT and procurement director, Bourne Leisure
Kevin Fitzpatrick, European CIO, Sodexho
Paul Hopkins, IT director, University of Newcastle
Jane Kimberlin, IT director, Domino's Pizza Group
Nick Masterson-Jones, IT director, Vocalink
Rory O'Boyle, head of IT, The Football Association
Jacques Rene, CTO, Ascend
Mike Roberts, IT director, The London Clinic
Richard Steel, CIO, London Borough of Newham
Ted Woodhouse, former IS director, Leeds Teaching Hospitals NHS Trust
Want to be part of silicon.com's CIO Jury and have your say on the hot issues for IT departments? If you are a CIO, CTO, IT director or equivalent at a large or small company in the private or public sector and you want to be part of silicon.com's CIO Jury pool, or you know an IT chief who should be, then drop us a line at editorial@silicon.com
Comments
There are 5 comments. Join the discussion
1. Karen Challinor
unfortunately by the time businesses work this one out it's usually too late for the staff they let go
2. Roger Perrin
Most of these arguments are based around the needs of large organisations who are always ebbing and flowing between options.
For the many small and medium sized companies outsourcing is essential if they are to obtain the expertise and flexibilty that is needed to keep up with the IT game.
Small companies find it difficult and expensive to attract full time IT staff, often only one. The work involved often can't fill the day and is therefore unfulfilling. They are not there when sick and on holiday. Good technical staff want challenges that a small company can't provide for long. The result is that staff retention is difficult as well as expensive.
3. anonymous
Is there a change in executive pay after a supposedly excellent cost saving outsourcing deal has been concluded but before the long term results are knows?
4. Julian Dobbins, Micro Focus
A huge stumbling block occurs when CIOs embark on outsourcing projects without identifying where the business value lies in their existing applications. In an economic climate where every penny spent on IT needs to be invested diligently, it is imperative that CIOs are not wasting outsourcing budgets on systems that are not providing value.
Rather than entering into such agreements blindly, CIOs can now employ application portfolio management (APM) tools not only to allow them to identify the prime targets for outsourcing, but also to manage the ongoing quality of the work carried out by service providers. APM ensures that companies can develop greater and more open communication with their providers, as well as a comprehensive understanding of the scope and complexity of what they are agreeing to maintain at the start of the project. As such, organisations can then accurately measure the performance of their applications and ensure that IT costs are not needlessly increased by outsourcing.
5. Mark Kobayashi-Hillary
It's true that it would be useful to more often analyse the benefits achieved one year or more into an outsourcing deal. Cost is one of the variables, and usually the headline one that clinches the deal, but there are many other factors involved. It might be perfectly reasonable to outsource even if it increases costs slightly, but results in a far better service level and improved flexibility. We should not always equate outsourcing with slashing costs... though in the present economic climate that is likely to be how it gets sold...