Fear Of Strangers: Outsourcing Motivates IT Departments To Reorganize

The movement toward outsourcing IT functions is forcing IT departments to reorganize, to revamp services and charges, and to focus on business processes, a Forrester Research analyst said on Tuesday at the TechX trade show in New York.

While fewer than 10% of businesses outsource some or all of their IT operations today, the threat of losing work to outsourcing companies--whether overseas or domestic--is forcing internal IT departments to change the way they operate, according to Robert McNeill, lead analyst for infrastructure outsourcing at Forrester Research. IT departments are reorganizing around business processes, putting together service catalogs to highlight their offerings, and reducing their costs and charges as they're forced to defend their existence on an annual basis, McNeill said.

The recent move by financial-services firm J.P. Morgan to cancel a major outsourcing deal and bring IT operations back in-house "will not dampen outsourcing," said McNeill. "Few companies that outsource ever bring things back in-house. It's a bold move. But it's expensive and fraught with risk."

The main drivers for outsourcing haven't changed: cost savings, reduction in capital outlays for IT gear, and the desire for a predictable monthly charge for commodity IT services. Spending on IT outsourcing should increase by 7% this year, McNeill said, even as prices for such services continue to decline. But there will be fewer megadeals as companies become more selective about the IT services and operations they outsource, he said.

More than four out of five outsourcing deals involve commodity IT services such as help-desk support. "It's hard for an IT department to keep commodity IT services in-house," McNeill said. "They have to justify it every year."

The move by outsourcing companies to sell services around specific business processes is causing some IT departments to do the same thing. They're being forced to, in some cases, so their companies can compare their costs with those offered by outsourcers. "Most IT departments aren't standardized around processes, they're built around technology infrastructure," he said. "They need to define processes and services to sell to the lines of businesses." McNeill said more IT departments are creating catalogs that list and describe the services being offered to the business workforce. "But they also need to offer benchmarks and market pricing."

IT departments also need to take on new tasks, including vendor management, simplifying processes, leveraging corporate purchasing strength, and identifying strategic suppliers. McNeill said the IT department at one oil company helped the firm cut the number of suppliers from 226 to 25 in the past two years. "More than half of the organizations we've studied have created dedicated vendor-management organizations, usually within the IT organization," he said.

Still, with cost as the main reason for considering outsourcing, McNeill said it was surprising to find that "most customers have no idea how much things costs" when provided by an internal IT department. However, most companies don't really know how much an outsourcing deal is costing them, either. "While outsourcing contracts promise to lower costs, many companies don't follow up to see if actual costs are lower," he said. Not only can add-on projects increase costs, but poor service and products from outsourcers mean that some companies aren't getting what they pay for. Businesses spend an additional 3% to 6% of contract costs to create and operate management and audit teams to supervise outsourcing contracts.

McNeill's advice: "Don't just focus on costs, focus on value."