Will IT outsourcing pay off? 5 key questions to ask

IT outsourcing can be a great way for many companies to save money and access new technologies – or it can create huge headaches and cause more problems than it solves. Here’s some help for organizations to decide when to outsource and when to keep services in-house. 

As anyone in IT knows, the past few years have not been kind to companies’ tech budgets. Most organizations have been forced to cut their tech spending, or at least keep the budget flat.

One way a lot of organizations responded: IT outsourcing. Handing over some IT services to a third party can cut costs, especially for smaller organizations without many IT people on staff.

In a survey conducted last year by consulting firm Bluewolf, 32% of organizations plan to increase their spending on IT outsourcing over the following 12-18 months.

The top motivators, according to the 200 IT pros surveyed:

  • Outsourcing boosts productivity and profitability
  • Companies are more flexible when outsourcing some IT services, and
  • It’s difficult to find IT staff with the skills to run some services in-house.

Companies find obstacles, too

While those are benefits that every company wants, IT outsourcing isn’t a magic formula for business success.

In fact, a common trend now is so-called “insourcing” — in other words, companies that have previously outsourced bringing those services back inside the organization.

In another survey last year, conducted by Forrester, 32% of companies that had been using third-party service providers were planning on ending those arrangements and bringing work back in-house.

These are some of the reasons companies are changing course on IT outsourcing:

  • The quality of the work was disappointing — Among the 1,000 IT pros surveyed by Forrester, nearly said they had experienced “poor service quality.
  • Savings weren’t as high as they expected — In a survey conducted by Lieberman Software, 42% of organizations said their IT outsourcing contracts had ended up costing them more than they expected. Often, companies suspected that an outsourcing firm had made up more work to get extra money from the organization.
  • Outsourcers lag behind in technology — Many companies’ outsourcing deals were inked several years ago. At the time, the provider may have been using the latest and greatest technology, but that may not be the case anymore. Many organizations believe their service providers are leaving them stuck in the past.
  • Conditions have changed — In some cases, companies have simply determined that their reasons for outsourcing no longer exist. For example, staffing woes may be easier now than when a deal was signed, or the company may have grown to a point where doing more in-house makes sense.

Will IT outsourcing save money?

One question companies often ask is whether outsourcing to an IT service provider will be cost-effective. Unfortunately, there’s no easy answer, and each organization must consider its own specific situation.

Here are some of the questions companies need to ask:

  • Do we have enough staff? This is especially critical for companies considering insourcing a previously outsourced operation. Firms that have been using a service provider for a long time may be surprised about how much manpower some parts of the IT operation take.
  • Is the work temporary or permanent? One situation in which outsourcing often makes sense is when the company needs to complete a short-term project, such as software development. In contrast, companies may find that over time, running an operation in-house may cost less than outsourcing for the long term.
  • How much control do we need? In any area of a company’s operations, anything that must be done in a specific and unique way is often best done in-house. Beyond the issue of control, companies also need to keep in mind that when they outsource something, there may be a lot of turnover in the project team.
  • Will the work change much? Likewise, if a project will be changing a lot, its often best done in-house. One benefit of outsourcing is that it’s predictable — the company pays a regular fee and, if all goes well, the work is done without too much involvement from the company’s own staff. For work that’s unpredictable, communicating changes to a provider can take as many resources as the work itself.
  • What are the real costs? This is probably the most complicated issue businesses must tackle, but figuring out the true costs of outsourcing a service and running operations in-house is critical to making the right decision. When evaluating in-house costs, keep in mind the money spent on staff, hardware, software and system maintenance. When looking at the cost of outsourcing, consider not just the money paid to the service provider, but also the time spent managing service agreements and other in-house costs.

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