Because IT budgets continue to be squeezed during the annual budget process at many companies, there probably aren’t many IT pros that haven’t given some thought to the possibility of being outsourced.  Or worse, you’ve already experienced losing your job due to outsourcing.  Whatever the case may be, like it or not, it’s obvious that outsourcing will always be a part of working in IT.  However, companies are beginning to realize what we could have told them long ago – that it’s not quite as easy and profitable as it first sounded.

Examining the 2004 to 2006 annual outsourcing studies by Diamond Management & Technology Consultants shows that while outsourcing among American companies continues to rise, they are doing so at a slower pace.  Why?  There are several explanations given.  It seems companies are struggling to quantify the value of their outsourcing efforts, determine exactly what it is they should outsource, measure its actual effectiveness and figure out how to manage a global pool of resources.  Because of these challenges, small to medium size business will probably find that it’s simply too risky to relinquish control to outside companies.

OK, I get it.  Wages are cheaper, much cheaper, in a place like India or China where most of the outsourced IT jobs are going.  But it’s very simplistic to measure the benefits to a company based on one variable such as wages.  What about quality of work and customer satisfaction?  The labor expenses per hour may be cheaper, but what about the added expense of doing jobs over again because there was a disconnect between what companies thought they were getting and what they received, or customers becoming dissatisfied with calling customer support and getting someone who barely spoke English.  Dell, anyone? 

Companies who outsource have been discovering that it’s difficult to manage outside resources, especially when those resources are on the other side of the globe.  According to a study by KPMG, outsourcing deals typically have a positive return over the first two years of a contract, but eventually spiral upward beyond what it would have cost to perform the work in-house.  The reason cited was a “lack of vendor management.”  KPMG went on to say that “it is a full-time job to manage an outsourcing provider.”  Giving up control of critical business functions, such as the development of financial and supply-chain software, to outside companies is a perfect way to give up market share, not gain it.  For outsourcing to be successful, many companies are finding that a full-time vendor relationship manager is needed.

Other studies, such as one by Compass, suggest that many companies who outsourced several years ago will decide to bring their projects back to the fold to be completed by internal IT staff.  Many of the outstanding contracts are expected to be due for renewal and CIOs will be busy examining whether the venture was worth the initial cost savings.  Unrealized or disappointing long-term gains are cited as the main reason for not renewing.  Businesses will be more selective in future projects they outsource rather than outsource entire IT business units.

There is outsourcing to offshore companies, and then there is outsourcing to domestic companies.  Both types have their positive and negative aspects.  When outsourcing to domestic companies, language, distance and culture cannot be blamed for failed relationships.  Instead, these deals too, can be victimized by a lack of oversight and clearly defined service-level agreements.  Setting expectations up-front and then managing the delivery of those expectations is the key in both instances. 

I see the most successful outsourcing ventures to be the ones that have a clear-cut beginning and a defined ending – temporary help and expertise to meet a very specific goal.  For example, signing a contract with a vendor to implement a SAN or migrate from Lotus Notes to Microsoft Exchange.  Even then, a local resource must be assigned to manage the vendor’s progress and performance.  Recurring meetings must be scheduled to monitor the project’s status, and to enable reporting to senior management.

Vendors who are taking advantage of the market for short-term outsourcing deals are able to add another significant revenue stream to their bottom-line while providing a desired service to customers.  Companies such as IBM, HP and Microsoft are able to up-sell services on top of the tangible product they’ve been providing for years.  Customers are able to free up key IT staff to work on more strategic initiatives.  If properly managed, these deals can be a win-win for both parties.

Outsourcing is here to stay.  Companies who learn to effectively manage their outsourcing relationships and identify the situations where outsourcing is appropriate will realize a competitive advantage.  The bottom-line is companies are held responsible for the product they present, not the vendor supplying the outsourced labor.  Customer response will ultimately dictate whether outsourcing was the right move.

What are your experiences with outsourcing?  Sound off and let me know!