Cost savings blamed for outsourcing death spiral

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Resellers pitching for outsourcing deals should pay more attention to program management and less to cost savings, if analysts at a global Gartner summit prove correct.

Speaking at an 'Outsourcing--the Next Generation' media summit in Sydney Gartner's global head of sourcing, US-based analyst Linda Cohen, argued that cost-savings are a bad reason to outsource anything.

“When you outsource to save money you [are] on a death spiral,” she said.

Cohen said that companies looking for some way to control costs, or save money on the capital investment for technology, would likely achieve short-term gains at the expense of long-term business viability.

“Outsourcing needs to be strategic and enduring,” she said. “Sourcing must enable your business goals.”

Outsourcing vendors which prioritised and marketed potential cost savings as the main goal were partly to blame, Cohen suggested. Outsourcing deals did not focus sufficiently on increasing IT efficiency to lift business processes, she said.

“When vendors are trying to get more and more deals to create economies of scale, to get better profits, they don't look beyond that. They feed to [client] management that outsourcing saves money and they let them believe that,” Cohen said.

Jon Marks, national sales manager for the Australian arm of large global IT services vendor Getronics, spoke to iTnews after the conference. He said smaller companies entering the outsourcing market, such as value-added resellers, sometimes failed to adequately understand their clients' needs.

“Business processes must be flexible enough to fit individual customer requirements. If it's around a helpdesk service, for example, having a central helpdesk isn't always the answer. Sometimes it makes more sense for there to be local helpdesks,” he said.

Marks said sometimes the answer which provided the best efficiencies and processes for the customer increased the cost. “But the overall advantage will outweigh that,” he said.

“Here we have quite a few resellers that are trying to move into outsourcing, but they're [mainly] doing it by buying a helpdesk package or something like that and going 'oh, we can do that for you'. Sometimes that's effective for the customer because of price, but long term they might not get value,” Marks added.

He said customers often suffered down the track when they realised that, through inadequately planned outsourcing, they had lost access to skills and intellectual property crucial for running their businesses.

“Initially, in the eyes of that organisation, [outsourcing] was potentially significant for its cost savings or moving assets off the balance sheet,” Marks said.

Gartner's Cohen said all technology purchases, including sourcing, must support the enterprise, with the future of sourcing centred on business process outsourcing. To commodify business processes, outsourcing vendors and customers needed to drill down into how deals would be managed, she said.

Outsourcing vendors and customers needed to find ways to ensure customers could retain control of crucial business aspects such as intellectual property, according to Cohen. “The vendors have to be more responsible when they take on these deals.”

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