Why do CIOs outsource? The price is right

Dollars may be driving most CIOs to outsource, but attendees at Gartner's outsourcing summit learned that it really should be more of a strategic decision.

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LOS ANGELES -- Users should outsource their IT operations strategically, building shared risk-reward partnerships with their vendors with the eye toward achieving long-term business benefits while cementing a shared commitment to delivering value.

Most users, though, are simply trying to save a few bucks.

That disparity between intentions and reality was evident this week at Gartner Inc.'s Outsourcing Summit 2003, where about 700 corporate IT managers gathered to debate the merits of contracting IT services to someone else.

Outsourcing has historically been a cost-cutting maneuver, but Gartner analysts took pains to urge users to think more strategically. "Saving money may be [the] primary initiative, but it must not be only initiative," said Linda Cohen, a Gartner managing vice president, in an opening address. Companies can outsource either to achieve efficiency, to enhance the business or to transform the business, she said. It's rare that saving money is the sole incentive.

However, users who were interviewed said their motivations are generally simpler. "It's all been about cost," said Bobby Russell, data center manager at First American Credco, in Poway, Calif. He said that many IT organizations outsourced operations over the last few years in order to achieve quick cost savings and now are backfilling to make the relationships more long-term. "We're all under way [with these relationships] now, and we're putting up the radar to make sure we don't wind up on the rocks," he said.

In an audience poll of more than 500 users that asked about their "primary goals" in choosing to outsource, "cost control" beat out all other options by a healthy margin.

One major factor: Outsourcing decisions are often driven by C-level execs who are irked at the high costs of IT. "I'm getting lot of calls from CIOs who are being challenged by their CEOs to prove that their costs are being managed properly," said David Ackerman, a Gartner vice president.

In another audience poll that asked attendees who was driving their outsourcing efforts, 45% of the respondents said it was the CEO or CFO.

Users agreed that win-win relationships are ideal, but they said the dynamics of the market are stacked against them coming to pass. "Suppliers like to talk about partnerships, shared risks and shared interests," said one IT manager, who works for a major consumer products company and asked not to be named. "But in my experience, they're mainly out for their own self-interests."

Added Eric Rocco, a managing vice president at Gartner, "The disconnect may be between what people are doing right now and what we're recommending they do."

But an overemphasis on cost savings may undermine the health of the outsourcing industry, analysts said. Relentless cost pressure weakens vendors, making them less able to respond to users' unique needs. Users need to negotiate more flexible contracts and give vendors the wherewithal to make money, the analysts said.

"Low-price deals eventually erode margins," said Gartner's Cohen. "The vendor is forced to cut delivery costs to correct the balance, and service quality is compromised."

Equally important is that users let vendors achieve economies of scale, analysts said. That means not insisting that they deliver customized services at mass-market prices. "Sustainable cost improvements can be delivered only through adapting to the vendor's operating environment," Cohen said.

However, economic trends are running the other way. The economic downturn has increased pressure on vendors to squeeze margins in the last two years, and prices have actually fallen, said David Ackerman, senior director of Gartner's outsourcing practice.

That may sound like good news to users, but analysts cautioned that the fragmented outsourcing market is vulnerable to consolidation and bankruptcies. That could leave some users with an unenforceable contract or a vendor that can't deliver on its commitments.

The new outsourcing watchwords are flexibility and economies of scale, analysts said. Gone are the multiyear fixed-price contracts of the early 1990s. Today's deals usually involve frequent revisions of price and service-level agreements as business needs change.

JP Morgan Chase & Co.'s CIO, John W. Schmidlin, noted that his firm's recent mega-outsourcing deal calls for senior executives from both companies to sit on each other's operational review boards to ensure that the contract is meeting business needs.

Gartner research director Rich Matlus added, "You're not just buying a product, you're buying a service. If you and your service provider can work at a common theme, you can be successful, but it has to be a win-win for both parties."

FOR MORE INFORMATION:

Offshore outsourcing becoming the 'in' thing for CIOs

When is it smart to sell the factory and outsource?

Dig deeper on IT spending and budgeting

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