The primary benefit expected from most large outsourcing contracts is cost savings. How big is this benefit? The realized savings from large off-shore outsourcing has been estimated at 20-30%. Results vary and it is difficult to calculate the exact savings because IT organizations do not have good baseline cost measurements before outsourcing. Other factors include start-up costs to transition responsibility and knowledge to a vendor, increased management costs to manage an off-shore vendor, and additional costs for layoffs or early retirement of existing staff.
If an organization is outsourcing IT simply to save money, they are taking big risks for relatively small savings. Economic factors (cost) that justify off-shore outsourcing are self-correcting. India and the Philippines have become expensive so we seek out other countries like Vietnam and China to save money. Currently, these escalating costs are the vendor’s problem. Once the existing contracts expire the cost increases will be added to future contracts. Outsourcing has also resulted in lower salaries in the United States. The combination of lower U.S. salaries and increasing off-shore costs will continue to erode the financial justification for off-shore outsourcing.
There are other benefits that can be achieved by outsourcing (providing you pick the right partner). The IT profession is still young and best practices are still maturing. Many organizations do not have the visibility and control required to effectively manage their IT service delivery. A company can gain control of their IT expenditures by outsourcing to a company who will manage IT service delivery using proven processes and metrics.
You do have to pick the right partner. Many outsourcing firms also suffer from a lack of process and high failure rates. Most off-shore outsourcers claim to have a high level of maturity on the SEI/CMMI scale. This is misleading because SEI/CMMI measures process maturity but not process effectiveness.
Why else would we outsource if not to save money? Outsourcing (on-shore or off-shore) can provide an increased level of visibility and control and can leverage the experience and capabilities of companies who specialize in delivering IT services. When companies outsource other services such as cafeteria management, the decision is made based on core competencies and not cost. Likewise, outsourcing of IT services should consider the same criteria. Outsourcing to vendors who simply offer lower cost but do not deliver a much higher level of service and process maturity simply increases risk with minimal benefit.
Secondly, outsourcing can be tactical in nature. Outsourcing application maintenance and support to a vendor allows the existing staff to work on strategic projects. This solution provides growth opportunities for the client staff to work on strategic projects while the vendor staff provides maintenance and support. When the system is finally retired, the vendor contract is ended.
Successful outsourcing requires clearly defined objectives/benefits, an understanding of baseline costs and capabilities, a high level of visibility and control, the agility to respond to changing business requirements, and shared risk.