Strategic CIO // IT Strategy
03:30 PM

In Depth: Customers Analyze Outsourcing Vendors And Strategies

An InformationWeek Research survey reveals that saving money has regained the top spot as the prime motivator for outsourcing.

Illustration by John SleddOutsourcing is becoming a penny-pincher's business. While outsourcers talk about building partnerships and providing access to specialized skills, most of their customers are primarily interested in saving money. Nearly two-thirds of the companies that hand off tech work to a third party--whether a domestic services provider or an offshore vendor--say cost cutting is the main reason for the move, according to an InformationWeek Research survey of 420 business technology professionals, the third in a series of surveys on outsourcing trends conducted over the past four years.

With cost such an important consideration, it's not surprising that more IT execs are giving work to overseas service companies that typically employ lower-paid workers. "If we use too many on-site people, we will not save money," Sue Powers, CIO at travel software and services provider Worldspan, says bluntly. Worldspan has outsourcing engagements with Tata Consultancy Services and InterGlobe Technologies, both based in India.

Money hasn't always dominated the agenda. In our 2004 survey, the most important factor driving outsourcing was access to operational expertise, cited by 47% of respondents. Now that's the most important factor for only 26% of companies surveyed. That a well-established vendor will get the job done right is increasingly taken for granted.

Accenture is one of the few Western IT services providers to consistently report strong growth in its outsourcing business in recent quarters. The company reported outsourcing revenue of $6 billion in fiscal 2005, an 18% jump over the previous year. That shouldn't be surprising. Known more for its consulting expertise, Accenture under CEO William Green has made the outsourcing business a priority. It's where the growth is, after all.

Accenture gets high marks across the board from customers, with an average score across 13 categories of 7.6. Its highest mark, 8.0, is for its reputation, which could be thanks to its well-regarded consulting arm. Its lowest score is 7.1, for cost/value.

Chart: Outsourcing Drivers: What are the most important factors driving your company's decision to work with an outsourcer?Dial Up or Down
Outsourcing is on the increase. Worldwide sales grew 6% to $624.4 billion last year, Gartner says. An important factor behind the growing popularity is that outsourcing gives companies the ability to vary IT capacity. With in-house personnel and IT systems, companies are limited in what they can do to reduce expenses when business is slow. When outsourced, IT resources can be dialed up or down depending on business cycles. That explains why 41% of survey respondents listed the flexibility to increase and decrease IT usage as their main motive for outsourcing--making it the No. 2 reason behind cost.

It's largely why paper and packaging company MeadWestvaco earlier this year signed a five-year, $200 million IT services deal with Affiliated Computer Services. ACS will provide MeadWestvaco with services ranging from application maintenance and support to midrange and mainframe management. "If you do it all yourself, it's a fixed cost," says MeadWestvaco CIO Jim McGrane. "It scales up pretty well but doesn't scale down worth a damn." That's an important consideration for a company like MeadWestvaco, which has undergone a series of acquisitions and divestitures.

Just over half of companies surveyed are spending $1 million or more on outsourcing. Increasingly, service providers based in India are the beneficiaries. For every dollar spent on outsourcing, 25 cents goes to an offshore vendor, up from 19 cents two years ago. The remaining 75 cents goes to a domestic service provider, which in turn could be doing some of the work offshore, too.

HP CEO Mark Hurd, like his counterpart at Accenture, is determined to increase the company's services business. "We'll be very, very focused on services," Hurd said last fall.

Hewlett-Packard is a relatively small but fast growing player in the market for broad, comprehensive outsourcing contracts. Its IT outsourcing revenue last year was $3 billion, up 24% from the previous year. This year also could be strong as the company begins work on a $700 million, five-year services engagement with General Motors.

Survey respondents give HP an average satisfaction score of 7.1, ranking it most highly in reputation, with a score of 7.5. Its lowest score, 6.6, is for cost/value.

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