Tip

Initial outsourcing costs will pay off later

Ed Parry, SearchCIO.com News Editor

Looking to save some money by looking outside for your IT services?

Get ready to spend some money first.

According to a new Gartner Inc. report, saving money can be costly at first. Analysts with the Stamford, Conn., firm said this week that the first steps in the outsourcing process can cost 2% to 5% of the projected annual price of the entire outsourcing deal.

Still, that could be money well spent.

Richard Matlus, research director for Gartner's sourcing group and one of the report's authors, said that, although there may be "substantial costs" involved with moving IT service delivery to the outside, those nascent costs are pennies in a bucket compared with the overall annual value of the deal.

"Making the investment required to get it right the first time is clearly minor compared to the risks and costs associated with a sub-optimal deal," he said.

Gartner analysts say the best course of action to sidestep those "sub-optimal" deals is to hire an independent advisory firm to help with the outsourcing strategy. Having an experienced adviser in your corner can speed up the process, help you pick the best external service provider (ESP), and generally maximize the deal's chances for success.

So how much will an adviser cost? Gartner says the typical rate ranges from 1% to 2.5% of the annual cost of the deal.

But, again, keep your eyes on the prize.

Michael Andersen, a vice president in Gartner's consulting

    Requires Free Membership to View

unit and co-author with Matlus of the report, said that the input of an experienced adviser can cut in half both the internal staff costs and the external legal fees "because of templates, tools and methods that speed up the process."

"Even if the investment in an adviser is at the high end of the range, the net cost is basically the same," he said.

The move to an ESP can also require some money up front, and it will drain more dollars if you have to transfer hardware or software. For example, Gartner says that, for a data center deal, transition costs can run from 5% to 15% of the annual deal value.

But with a deal that involves less tangible technology, like a help desk, the transition costs are much lower: 2% to 5% of the annual deal value.

This is another area where an adviser can help.

"Third-party verification and validation on transition planning and management can reduce the risk of unplanned timing and cost issues," Matlus said.

Another survey by analyst firm Meta Group found that about half of all companies won't even consider outsourcing as an option for cutting overhead.

According to the research from Stamford, Conn.-based Meta, many CIOs and IT managers are turned off by potentially tricky outsourcing agreements; they want to avoid mistakes that could result in new IT spending.

FOR MORE INFORMATION:

>> Past editions of the ROI Insider

>> Submit your own questions to our resident ROI expert

>> Ten criteria for offshore outsourcing, part 1


This was first published in May 2003

There are Comments. Add yours.

 
TIP: Want to include a code block in your comment? Use <pre> or <code> tags around the desired text. Ex: <code>insert code</code>

REGISTER or login:

Forgot Password?
By submitting you agree to receive email from TechTarget and its partners. If you reside outside of the United States, you consent to having your personal data transferred to and processed in the United States. Privacy
Sort by: OldestNewest

Forgot Password?

No problem! Submit your e-mail address below. We'll send you an email containing your password.

Your password has been sent to:

Disclaimer: Our Tips Exchange is a forum for you to share technical advice and expertise with your peers and to learn from other enterprise IT professionals. TechTarget provides the infrastructure to facilitate this sharing of information. However, we cannot guarantee the accuracy or validity of the material submitted. You agree that your use of the Ask The Expert services and your reliance on any questions, answers, information or other materials received through this Web site is at your own risk.