Study shows not offshoring could cost you millions

CIOs aren't offshoring enough, and it's a mistake that's costing their companies millions of dollars. That's the word from a new study.

Companies across the globe are wasting millions of dollars every year in IT because they aren't doing enough offshore outsourcing, according to a new study.

Business Engine, a project portfolio management software firm based in San Francisco, conducted the study to find out which business areas within companies deliver the most value. More than 100 IT executives at 30 companies in North America and Europe were surveyed over a three-year period. Nearly half of the companies surveyed are financial institutions.

Researchers found that Global 2000 companies collectively waste more than $300 million every year because they do a poor job of managing IT projects.

IT departments squander money because they don't take advantage of offshore outsourcing, researchers said. Nearly 30% of that $300 million figure can be blamed on companies not taking advantage of cheaper labor overseas.

"We're talking 'order of magnitude' cheaper," said Kazim Isfahani, the report's author. "It's unfathomable that you would not go offshore. That's how great the discrepancy is."

The study blamed poor visibility and control of IT projects and failure to align IT with business strategy as the other great money wasters. Isfahani believes that offshoring is an essential part of alignment because of the value it delivers to the business via cost savings. "I don't see how you can divorce the two," he said.

Isfahani believes that CIOs who aren't looking into offshore outsourcing are making a big mistake.

"At least start a pilot to see what you can do," he said.

"I am always suspicious of blanket statements like that -- one size does not fit all," said John Pfeiffer, CIO of Corrections Corporation of America (CCA), a private sector prison company based in Nashville, Tenn. "Outsourcing fits based on where IT fits into the overall strategy."

Pfeiffer has used a U.S.-based, third-party vendor for software development work, and that company has kicked some of the work overseas. But that's about the extent of CCA's offshore outsourcing strategy.

"If you're more mature and in a maintenance mode, it's more sensible," he said. "I think the appropriateness of it depends on where you are in the IT strategy."

CCA's IT strategy is bringing the company into the electronic age. Pfeiffer and his team have recently automated the prisoner booking system, which is no small feat for a company that manages more than 60,000 inmates and 15,000 employees nationwide. Pfeiffer did look at outsourcing CCA's help desk but decided that it didn't make sense.

"Our customers won't tolerate buck passing -- they want to talk to a person who understands a problem all the way to its resolution," he said. "A lot of knowledge fails to transfer in a problem-tracking system."

Pfeiffer anticipated that any cost benefits of an outsourced help desk would cause more problems in the long run.

"I think [to outsource the help desk] would be misaligned with business because no one would tolerate a degradation in service levels," he said.

Pfeiffer agrees that offshoring is worth a look, but it must be a very careful and well-informed look .

"There are clear benefits to offshore activities, and it would be remiss to not consider it, but you have to consider the ramifications."


This was first published in July 2004

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