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Gartner: Outsourcing deals based on price alone are likely doomed

According to a new study, if you selected a vendor based on cost savings alone your bubble is bound to burst.

A new survey shows that many CIOs are still focused on short-term savings rather than long-term business success when establishing outsourcing relationships -- and that it's costing them in the long run.

According to a study released this week by Stamford, Conn.-based research firm Gartner Inc., overall attitudes toward outsourcing contracts tend to be positive at the outset. But that satisfaction level drops as the project progresses and strategic goals aren't met.

According to a survey of 945 IT professionals, more than 50% of the respondents said they expected to see significant cost savings by outsourcing. Fewer organizations said their objective in outsourcing was to make companies more competitive in the market.

If they [have a successful outsourcing relationship], it's by luck, not because they knew how to select a vendor.
Allie Young
analystGartner Inc.
"The truth of the matter," said Allie Young, research vice president for Gartner's Sourcing research group, "is that cost focus alone is not going to be satisfying over the long term."

As a result, CIOs end up disappointed because they don't get the innovation for which they had hoped. They blame the outsourcer when the root of the problem is in their own inability to pick the right outsourcer.

"They still outsource on an ad hoc basis rather than embracing a strategic multisourcing approach," Young said.

Detroit-based General Motors Corp. is among the big-name companies that have been successful in what Gartner says is the best way for many businesses to manage outsourcing contracts -- signing with several vendors of varying sizes to meet strategic initiatives.

Most companies are doing what Gartner refers to as "tactical outsourcing." That means they're making decisions to outsource on a case-by-case basis. "It's akin to a company having each business unit buying their own pencils," Young said. "There's no procurement strategy."

Also problematic is that every CIO will tell you they want an outsourcer that can customize solutions to fit their needs. Problem is, said Young, too many of them negotiate strictly on price.

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"They want them to act like a partner, but they want to drive the cost focus to the point where the providers are not making a profit," Young said. "And that's only a bad thing for the client."

As outsourcing popularity and prevalence increases, many CIOs view it as a "quick fix" solution to their business problems. Unfortunately, that approach isn't going to work, Young said. CIOs need to go beyond price and look more at how their internal and external resources will work together and enable their business goals. The lack of a vendor selection strategy is the leading reason why CIOs are not getting the value they expect out of the outsourcing relationships, Young said. "If they do, it's by luck, not because they knew how to select a vendor."

Penny-wise or penny foolish

The bottom line is that CIOs need to consider that the danger in focusing on the cheapest offer is like anything else -- you make tradeoffs in quality.

People who fail to address outsourcing strategically rather than tactically probably haven't done enough homework to understand why they should be doing outsourcing in the first place, said Tony Viola, director of marketing for IT services firm Patni Computer Systems Inc. in Cambridge, Mass.

"They'll wind up with something that's not going to meet their needs," he said.

In less complex, shorter-term arrangements -- say a six-month software upgrade, it's probably OK to cut a deal based on the lowest price.

"In order to get to the project that has substantial impact on the company, you have to take on bigger projects that have bigger impact," Viola said. "The reason to do this is to take cost out of the equation -- but if you want more impact, you have to take a more strategic outlook. That's the only way to enhance competitiveness."

Still, cost savings will likely continue to be the driving force behind many outsourcing deals. Cigna Healthcare just announced it would send some of its back-office service operations to the Philippines, affecting about 91 Cigna employees in its Hartford, Conn., and Chattanooga, Tenn., locations. In a statement Tuesday, the insurer said it was moving to a new model that will help deliver better service by taking cost out of the health system with a lower-cost provider such as Accenture Ltd.

The company said that while the decision to outsource was "very difficult," it was "equally important that we concentrate our resources on improving the service experience for our medical customers and members while maintaining cost-effective operations with staffing levels to match our capacity and workload."

Let us know what you think about the story; e-mail: Kate Evans-Correia, News Editor

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