Outsourcing trend continues, but drivers behind it are shifting

Two of the most common questions about IT outsourcing are “who’s doing it?” and “why?” An industry study published this month offers some current insights on both of these questions.

IT Toolbox, an online community which has developed a large database of IT best practices and user knowledge, recently surveyed 612 IT executives on their attitudes and plans regarding outsourcing. In some cases, the responses were predictable, but in other cases there were indications of some major shifts within the outsourcing market. Let’s take a look at the data to see how it matches with traditional trends and conventional wisdom.

Nearly three quarters of enterprises are doing some level of IT outsourcing, according to the survey. Some 58% are outsourcing less than half of their IT environments, indicating that there is far more out-tasking than full outsourcing. Some 12% said they are outsourcing between 50% and 99% of their environments; only 2% were completely outsourcing IT.

With all the hype surrounding outsourcing, then, it seems that IT managers and staffs are not nearly as endangered as some pundits may have suggested. While there are a few companies that may actually be in a situation of “perform or be outsourced,” most companies are using outsourcing sparingly, for specific tasks or services. Even in a very troubled economy, there appears to be no widespread rush to full outsourcing.

The 28% of enterprises doing no outsourcing were asked why they had chosen not to do so. The vast majority of those respondents replied simply that they had adequate IT resources in house. This is an increasingly popular opinion as business growth remains slow, lessening the workload, and as the economy remains weak, improving the pool of available IT staff. The only positive thing about a poor job market is that it becomes easier to find and retain highly-skilled workers in the enterprise.

Among enterprises that are doing outsourcing, 36% said that cost-savings is the key driver behind their decision to do so. This response outdistanced the No. 2 response, “need for special skills” (14.7%), and the No. 3 response, “need to free up resources for other purposes” (13.8%), by a wide margin.

This response is interesting, because numerous studies over the last decade have shown that outsourcing has a very spotty track record in achieving cost savings. It is likely that many of the respondents actually meant to cite cost predictability as a chief benefit, because outsourcing often eliminates unexpected spikes in costs or resources that frequently occur in internal IT environments. Other respondents may have targeted cost savings as the chief goal in outsourcing, but history has shown that a significant portion of these respondents will be disappointed in the actual savings they achieve.

Which functions are being out-tasked? According to the survey, 37.9% are outsourcing software maintenance and support, while 34.5% are outsourcing hardware maintenance and support. Development and integration were cited by 32.7% (respondents were allowed to give more than one answer).

These responses also offer some new insights, because they suggest that outsourcing is most frequently used for operational maintenance, rather than strategic projects such as application development or systems integration. The largest outsourcing companies are often called “systems integrators” because of their focus on this function, but survey responses suggest that such third-party providers are more often asked to help with simple, repetitive maintenance than with sophisticated integration.

Overall, the IT Toolbox survey indicates that while outsourcing continues to be a major issue in many enterprises, there also is a continuing shift in the rationale and processes behind it. Over time, it is likely that outsourcing “logic” will continue to change with the path of business.

The IT Toolbox study results can be found at http://CRM.ITtoolbox.com/research/2003ITOutsourcingSurvey.asp?i=60