"The reason for the dramatic growth is quite simple," says Lance Travis, lead researcher on the study. "Cost savings from outsourcing are too compelling to ignore. The more aggressive a company's outsourcing strategy, the more money it can save. Unfortunately, risk increases along with savings."
The lure of offshore outsourcing is particularly enticing because so much money can be saved, he says. Also, the dynamics of offshore outsourcing are changing rapidly. With the help of improved VPN technology, some IT managers are finding offshore operations that failed just three years ago can often be implemented relatively painlessly.
Network advances in security, leased lines, and storage all contribute to making offshore outsourcing painless for the experienced IT manager who may have a tight budget.
Travis remembers from his days at Hewlett-Packard that networks were not so sophisticated--with the result that usually only the largest of the multinational companies could afford to use offshore outsourcing in a big way. One of the major changes is that companies with undersized budgets now can afford offshore outsourcing because the technology is cheaper and more reliable.
"Almost everyone who does a first offshore [job], has a problem," Travis says. "The second and third attempts gradually get better. The culprit is often a bad process at home."
Many IT managers have poor processes at their internal installations that manage to perform well even though the IT people may be operating in an ad hoc manner, he says. But this situation is a recipe for disaster when operations are moved offshore.
The applications that seem to be most successful in offshore outsourcing are generally the easiest computing tasks--for instance, payroll, human resources, and benefits. Conversely, more complex work--he mentioned ERP environments such as SAP and PeopleSoft--are more likely to fare better when kept in house. Obviously the strategically important IT tasks should remain in house.
As an example of a successful move of computing activity offshore, Travis points to the example of Kana Software Inc. The California-based company has moved most of its R & D functions to India. "They're getting fine quality work in India," Travis says. "But they've kept their product architecture and product management in house."
Closer to home, Travis says the recent boom in compliance initiatives--fueled largely by the recent Sarbanes-Oxley legislation requiring better accounting record keeping--is causing IT managers to consider outsourcing compliance applications. Noting that compliance issues are "non-strategic tasks," he suggests they are good candidates for outsourcing "to experts that guarantee their services."
When an IT installation takes advantage of the repertoire of outsourcing available, Travis says many IT budgets can be cut by 40%. It won't always be easy, he says, but it will be worth it in the long run.