IT outsourcing spins tales of woe

Many organisations have used outsourcing as a universal purgative in an attempt to rid themselves of all their technological evils and woes, according to Farrell and Associates managing director John Farrell.

Wholesale outsourcing, he said, inevitably fails which is why new trends have emerged in outsourcing to replace previous models including a move toward more selective and strategic outsourcing.

Speaking at a seminar series attended by eight Federal Government agencies, Farrell said the most common problem listed by customers as to why projects fail is vendor promises that never materialise.

This is particularly true for cost savings, he said, but research shows very few outsourcing projects save money.

"One of the main reasons Federal And State Government departments were so keen to outsource is that they were told they could save hundreds of millions of dollars, but this problem of non-existent cost savings is more a sympton than a cause; it reflects much deeper problems in the organisation," Farrell said.

"These problems are mainly concerned with the organisation having taken for granted many of the services previously provided by in-house IT staff; services that are not costed and therefore hidden as far as the company is concerned."

IT requirements have to be fully defined in any outsourcing arrangement, he said, as the provider is within his rights to charge additional fees for any change in the environment.

Farrell said poor buying practices of many IT departments, along with a lack of IT standards has also contributed to rising costs.

A key management capability has to be retained in-house, he said, to manage the outsourcing vendor and contract levels.

Outsourcing vendors also promise organisations that they can reduce costs due to the fact they can buy IT hardware and software at much lower costs because of the large volumes they buy.

However, in reality, Farrell said, IT hardware margins are typically 4 to 7 per cent; most organisations enjoy the same discounts.

He said vendors are also aware that over 12 months or more the cost of hardware drops but organisations are locked into three- to five-year contracts at the higher rate.

The price of software is also changing in response to the outsourcing phenomenon.

"Software vendors have been introducing new forms of software pricing which circumvents the price advantage enjoyed by outsourcing vendors; some charge for their software on the basis of the size of the hardware," Farrell said.

"Many software vendors do not allow software licences to be transferred which means if the outsourcing vendor takes over an organisation's IT assets, new licences must be purchased forcing the organisation to pay for the same software twice. Or, there may be a transfer fee which can be up to $500,000 or more in the case of large mainframe software."

Companies often mistakenly believe that by outsourcing IT they will instantly get access to the latest technology.

"This misconception regarding the outsourcer's ability to magically produce the latest technology when the in-house staff supposedly couldn't, can also lead to the organisation being locked into the wrong latest technology," Farrell said.

"When the organisation effectively hands over control of this function to the outsourcer, he then becomes subject to the whims of the provider as to what areas of new technology he will advance in the future."

If the organisation tries to dictate the new technology the outsourcer can invoke the "change of character" clauses that are prevalent in most contracts.

Farrell said the latest technology isn't always required because most functions that are needed today are word processing, spreadsheet capabilities, and staff access to corporate information.

He said IT managers agree that 90 per cent of their organisational functions don't require a Pentium 200 MMX with 32Mb of Memory 2.1Gb of HDD and a 20-speed CD-ROM.

Organisations also look to outsourcers to access skilled resources.

"The truth is that behind the scenes there is a large sub-industry between the outsourcers and contracting agencies; the outsourcers don't want it to be publicly known that they don't really have in-house all the skills and resources they proclaim to have," Farrell said.

"They can't advertise so they use contracting agencies as intermediaries; this means there are two sets of overheads for the contracted person."

Organisations that outsource, which includes handing over IT staff to the vendor, have great expectations of having access to the outsourcer's skilled resources only to find "they are supported by their previous staff and additional vendor expertise is expensive".

Farrell said IT staff that are outsourced should be worried because anecdotal evidence suggests that up to two-thirds of staff that move to an outsourcer are gone within 12 months. The human factor, he said, is often forgotten.

"The specialist skills and knowledge that staff have gained from working within an organisation over many years is passed on to the outsourcer; typically the outsourcer will take the best talent to other potential outsourcing organisations to demonstrate their depth and breadth of talent," he said.

Once outsourced, Farrell said the unique information that each organisation has is potentially available to competitors.

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