Outsourcing vs. keeping it in-house

Horse is out of the barn on this one – question is how much to outsource

Outsourcing isn’t just about cost savings any more. Customer relationships and expanding geographical reach are other potential benefits, proponents say.

To outsource or not to outsource, that was the question. While it still is an unpopular action for corporations to take, most large companies – and increasingly small-to-midsize firms – outsource work at some point or another. And for good reason: financially -- IT shops that outsource infrastructure management and application services can expect to save 12% to 17% annually on average, which means U.S. companies are sitting on about $10 billion in potential savings, according to a recent Forrester Research report

Savings are certainly the main draw of outsourcing, but PricewaterhouseCoopers research recently noted that other reasons for outsourcing are on the rise. For instance, more than 40% of respondents to its recent outsourcing study said they would outsource to improve customer relationships. Another 37% said outsourcing could help them develop new products or services, and about one-third said outsourcing would be important in helping companies expand into geographies they couldn’t otherwise enter.

The survey also revealed that executives increasingly are willing to outsource functions considered core to the business. "Many respondents (53%) indicated they outsource activities that they consider to be core," the report stated. Although IT remained the most outsourced activity, with about 60% sending those duties outside their companies, 70% of respondents outsource one or more of what could be considered strategic functions. More than half outsource production or delivery of core products and services, about one-third outsource sales and marketing, and another 32% outsource R&D activities.

There are functions companies are reluctant to outsource, financial and security applications among them. But at least on the security side, that is changing too. Outsourced security services have become more popular in the last few years, as companies look to outsource everything from monitoring of intrusion detection and firewall devices to watching access control lists and handling e-mail security; says Andreas Antonopoulos, senior vice president and founding partner of Nemertes Research and a Network World columnist.

What has changed over time is that companies don’t outsource all functions but rather pick and choose. For example, while some billion dollar mega-deals are still getting signed by companies such as General Motors and Johnson & Johnson, most deals are not that large. The average size of the billion-plus contract in the first quarter of last year was $9.6 billion, but in the third quarter of 2007, it was down to $2.4 billion, researchers at TPI said recently. The total contract value of outsourcing contracts signed in the third quarter was down 16%, TPI said.

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