by Ian S. Hayes

Saving money has always been one of the drivers for considering outsourcing, but it usually fell behind more strategic motivations, such as focusing on core competencies or freeing internal staff for other initiatives. However, in these tighter economic times, more companies are turning to outsourcing as a means to reduce and control IT costs. Is it possible to save money through outsourcing? Of course! Are you guaranteed to save money if you outsource? Of course not! Can you save money by copying the methods used by outsourcers within your organization (insourcing)? Maybe, maybe not!

To a large degree, your ability to save money depends on the structure of the deal and the experience of the outsourcer, but willingness to accept change is perhaps the most important factor. It’s important to remember the old adage, "Doing the same things with the same people in the same way gets the same results." To which we can add "for the same or even higher costs." For example, if we turn over a three-year Java programmer to an outsourcer, we will still pay that programmer’s salary, plus an increment for the outsourcer’s overhead and profit.

Gaining cost savings is not rocket science; it’s a matter of reducing workload, using resources more effectively, and releasing freed resources. The first two steps provide the means to free resources, but the actual savings come from releasing those resources.

Reduce Workload

This step is obvious-if we do less work, we need fewer hardware, software, and people resources. The trick is to identify and retain value-adding work, while eliminating extraneous and lower-value tasks. Outsourcers use service-level agreements (SLAs) and statements of work (SOWs) to set project boundaries and control the volume of work. Typical areas of focus include:

• Reducing unnecessary work by requiring better justifications for work requests and eliminating "under the table" work (those little efforts that are done as favors account for a surprisingly high level of resources in most IT organizations)
• Improving quality to reduce rework
• Consolidating applications, platforms, and overlapping functions to reduce support and staffing overhead

 

Increase Efficiency

Once the workload is controlled, use efficiency improvements to reduce the quantity of resources needed to accomplish that work. Experienced outsourcers use best practices as part of their outsourcing methodologies. Outsourcers increase overall efficiency by:

• Enhancing personal efficiency through training, software tools, and incentives
• Implementing and enforcing the use of more efficient IT processes

 

Lower Resource Costs

The previous steps lay the foundation for cost savings. The actual savings are gained through one or more of the following methods:

• Downsizing. Downsizing includes canceling unnecessary software licenses, unloading extra hardware, and releasing newly freed staff members. Outsourcers can often transfer redundant personnel to other assignments, but IT organizations pursuing insourcing are responsible for making their own staff reductions.
• Downscaling. Methodologies and efficiency improvements often allow a given task to be performed by more junior, and therefore less expensive, staff members. Also, IT organizations often retain staff members performing at levels beneath their current pay scales. A classic question is whether an individual is a five-year C programmer or five times a one-year C programmer.
• Relocating. Moving operations outside of major metropolitan areas provides reductions in facility costs and staff salaries. Many outsourcers rely on off-site development centers in less expensive onshore, nearshore, or offshore regions to reduce staffing costs.

If your organization has the management backing, political skills, and fortitude to implement the above steps internally, an insourcing solution is likely to provide the greatest cost savings. Unfortunately, in practice, most IT organizations have trouble implementing and enforcing best practices and are loath to take responsibility for the ensuing staff reductions. As a result, they achieve a lower level of savings than is possible through a highly qualified outsourcer.

If pursuing outsourcing is your method of choice, find an experienced outsourcer who is willing to contractually guarantee cost savings across the life of the engagement. Be sure to review the approach the outsourcer will use to achieve the promised reductions. And remember, significant cost savings cannot be achieved without significant changes to the current IT environment.