Gartner warns against cheap outsourcing deals

Bad terms blamed for outsourcing failures.

Excessively low prices could be to blame for a recent bout of publicised IT outsourcing bungles, Gartner warned CIOs this week.

Speaking at the firm's annual ITxpo in Sydney, chief of research Linda Cohen said new strategies and skills were needed to establish successful sourcing arrangements.

She highlighted the difference between 'sourcing' and 'procurement', and urged attendees to weigh risk and value against price.

Many outsourcing deals were "priced to win", she said.

"Our biggest concern right now is most of these were not priced to deliver. We know that is not a sustainable market.

"Procurement sort of sets us up to a view that price is our only lens," she said.

"Lowering risk, agility, expandability, scalability, new methods of operation may be more important to business than price ... weight them appropriately."

Outsourcers have been blamed for recent outages including a Virgin Blue check-in systems outage that grounded 116 flights, and the loss of 46,000 customer details by insurance company Zurich UK's outsourcer.

Cohen told attendees to prepare for more frequent renegotiations. Gartner analyst Christopher Ambrose said business should "be prepared to renegotiate forever".

Ambrose said the price of a project was determined by its scope and scale, the workload volume, support environment, technical environment, service levels, terms and conditions, labour market factors and geographic distribution.

Depending on the project's aim, payments could be fixed, or based on benefit, use, deliverables or incentives.

According to Gartner's 2009-10 research, businesses typically reduced costs by 7-10 percent by outsourcing data centre services and 8-12 percent for desktop outsourcing.

Outsourced help desk services reduced costs by 12-17 percent, network services by 5-8 percent and application hosting services by 8-12 percent.

Cohen told CIOs to take charge of their sourcing arrangements in strategic, rather than management, roles as external suppliers became increasingly common in the enterprise.

It was "too easy to press the accept button" and bring new technology into the enterprise, she said, calling for greater demand management.

"Make your decisions based on 'why'," she said. "If we don't know the real reason, we're going to buy the wrong thing with the wrong terms for the wrong reason.

"We have to start to think about IT sourcing in a much more holistic way. It's not about the buy or the access alone.

"While there's a need for us collectively to get together and make these decisions, somebody's got to be the daddy around here," she said.