Outsourcing: What CIOs Need to Know

By Baselinemag  |  Posted 2006-08-02 Print this article Print

Is information-technology outsourcing on the wane? No, says The Hackett Group's Scott Holland—who claims "world-class" companies farm out about half their I.T. infrastructure operations and will continue to find new areas to outsource.

Several consulting and information-technology management firms have recently come out with studies claiming that outsourcing is on the decline. According to a July survey by Diamond Management & Technology Consultants, for instance, 9% of respondents employing onshore services and 8% using offshore services said they planned to cut levels of outsourcing this year—whereas none of the respondents on the firm's survey last year said they would decrease their outsourcing spending.

The Hackett Group, an Atlanta-based research, benchmarking and business transformation services firm, is more bullish, predicting that I.T. outsourcing is thriving and will continue to do so for the foreseeable future. Baseline contributing editor Laton McCartney recently interviewed Scott Holland, the company's senior business adviser.

Q: According to your research, the typical company dedicates just over 9% of its I.T. spending to outsourcing while companies with "world-class" I.T. organizations [companies that achieve top quartile performance across a range of efficiency and effectiveness metrics in Hackett's I.T. benchmark] spend more than 14% of their I.T. budgets on outsourcing. You also say outsourcing is growing, especially among world-class corporations. How specifically is that money being spent?

A: On technology infrastructure. World-class companies today outsource about 50% of their technology infrastructure. The other area is application management. A little more than 20% of world-class companies outsource apps management.

Q: Where is the growth in outsourcing coming from?

A: The key here is that people are taking the commodity-based services and really looking to drive costs out, either through an onshore outsource relationship or through offshore, low-cost labor. The world-class companies in particular are driving that low-cost labor model.

Q: Has there been a shift in terms of where outsourcing is going offshore?

A: Some of the large companies have footprints that already exist in certain countries. Brazil is one that's coming up a fair amount, as is Hungary and Latin America, so we are seeing discussions outside the pure Indian model.

Q: It's no secret that a lot of companies haven't realized the benefits and savings they'd hoped for with outsourcing. Can you point to any particular reason for this?

A: What we find is that organizations that really spend a fair amount of time implementing best practices, really reducing complexity, and streamlining and standardizing their operations beforehand see higher degrees of success when they go to the outsourcing scenario. As an example, we worked with a particular company over the last four years that benchmarked and got an established baseline of where they were. Our benchmark is based on best practices. They then understood where the best opportunities were for them and spent the next couple of years implementing best practices. Lo and behold, when they finally sat down to do contract negotiations with their outsourcer—I sat in on some of those conversations—it was a very, very constructive and pleasant relationship.

Next Page: Where Companies Go Wrong


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