IT outsourcing is risky business

IT outsourcing is risky business

The term "information technology (IT) outsourcing" refers to an organization's sourcing some or all of its IT requirements from other organizations, instead of training existing staff or hiring new staff to provide the IT resources that it needs. There are advantages and disadvantages to either strategy. In order to ensure that an organization meets its current and future IT requirements, management must maintain the correct balance between outsourcing and in-house IT development.

Evaluating the risk

The ever-growing development of IT in general, and of e-business in particular, places great demands on organizations to stay at the forefront of this technology. This is true across the full spectrum of business activity. So, when sourcing an organization's IT requirements, management must carefully evaluate all possible approaches.

Within the next five years, up to one-third of an organization's IT budget will be outsourced

As most organizations have neither the expertise nor the resources to provide and maintain their current and future IT requirements, management must outsource at least a portion of their IT requirements. Current indications are that, within the next five years, up to one-third of an organization's IT budget will be outsourced. In this case, it is important for management to understand the high risk inherent in this strategy.

Source of the risk

The risk involved in IT outsourcing comes mainly from hidden costs and the inability of IT vendors to honor the initial claims they make for the products and services that they undertake to supply.

It is often very costly to terminate a contract prematurely if things are not going to plan

In the past, there have been many cases of organizations committing themselves to outsourcing their IT requirements from a single vendor for too long a period - up to 10 years in some cases. IT is evolving so quickly that this can prove to be a mistake. It is often very costly to terminate a contract prematurely if things are not going to plan.

If an organization outsources all, or even a large proportion, of its IT requirements, it risks losing control of what is often a vital factor in its future development and even its survival.

Outsourcing contracts - long or short?

Today, most organizations that outsource their IT requirements do so with the benefit of the experiences, good and bad, of other organizations that have done so in the past. With careful planning, these organizations can now benefit from the expertise of IT professionals while still maintaining the control that is crucial to their organization's success and growth. Typically, an organization will outsource only about 20 percent of its IT requirements and even this will be subdivided among a range of suppliers.

Most IT outsourcing contracts now have a duration of between three and five years. Currently, there is widespread agreement that this is the optimum duration for an IT outsourcing contract. By adhering to this recommendation, management will ensure that they can, if necessary, reap the benefits offered by any alternative IT supplier who might appear in the marketplace, offering a cheaper or more comprehensive package.

When an organization commits itself by contract unreservedly to an IT supplier for periods of more than five years, the supplier can become complacent or even negligent, safe in the knowledge that it has secured a long, lucrative contract. An associated problem is that many IT suppliers give more of their energies to attracting new clients than they do to servicing existing ones. Organizations also risk inadvertently giving a monopoly to a few IT suppliers, thereby reducing the number of competitors, when they give large, long-term contracts to IT suppliers. Many report that IT suppliers work harder to please them when there is a real danger that they will lose the contract if the client is dissatisfied. The supplier's desire to give excellent service to the client really manifests itself close to the time that the contract is due for renewal. For these reasons, it makes sense for an organization to negotiate short-term IT outsourcing contracts.

Keep control

Management can retain greater control over the running of the organization by employing a group of skilled IT professionals to liaise with the IT suppliers. Although an organization can save money by outsourcing, doing so can adversely affect other aspects of that organization's operations, for example its performance in the marketplace and its financial growth.

In general, if an organization has staff with the expertise to manage and develop its own IT requirements, it is better to work with this, rather than reduce staff in an attempt to save money.

When an organization employs its own IT professionals, it is in a position to validate whether a potential IT supplier does actually have the staff and resources that it claims to have. Often, IT suppliers make exaggerated claims about their abilities and, having secured a contract, will either subcontract some of the work or, worse, fail to deliver the service as originally agreed. As subcontracting can lead to problems such as copyright ownership, excessive costs, and mismanagement, it is better for an organization not to contract to an IT supplier who is not able to deliver the IT service that that organization requires.