Outsourcing Information Technology: Cutting Costs Or Cutting Your Throat?

According to Chuck Johnston, director, industry marketing, for Callidus Software Inc., San Jose, Calif., outsourcing can be cheaper, but it isnt always. Outsourcing functions such as network management and telecommunications management can, indeed, be less expensive than handling such operations in-house.

But the story is different when a company starts to look at outsourcing applications and applications development, deciding not to have an IT department anymore, says Johnston, formerly an insurance industry analyst with META Group Inc., Stamford, Conn.

"Based on my experience, [such outsourcing] seems cheaper in the beginning, but most companies have unique business operations, so they have to adjust the outsourced platform to meet their needs," he explains. The alternative, he notes, is for the company to change its business processes to adjust to the outsourcers more generic processes. Either way, "it can be very expensive for a company."

Theres also the outsourcers profit motive to be considered, says Johnston. The outsourcer may add 10% to 15% to its prices in order to make a profit. "You cant zero-base the operation like you could if it was your own company," he observes.

International outsourcing brings its own set of problems, Johnston continues. While the offshore outsourcers rates are often much lower than those of U.S.-based companies, "theres a reason for that price difference," he asserts. "Its not easy for that [international] person to come and work for you in Cleveland."

Companies who outsource internationally must layer in additional costs for communication, coordination and training, says Johnston. In addition, a remote work force makes project management more difficult and expensive.

Now lets get back to that key point about outsourcing that puts people on the street. If were talking about outsourcing IT to a foreign country, were talking about exporting American jobs, a practice we should hardly condone in a soft economy.

Insurers are quick to point out that income from investments has plummeted over the past few years, but if theyre also sending American IT jobs to foreign soil, they should be pointing fingers squarely at themselves. Granted, most companies are not exporting high volumes of jobs, but try telling that to the programmer whos just been axed or the database manager whos been downsized.

"Youre not only transferring jobs," adds Johnston, "youre transferring intellectual property [to foreign countries]. It weakens our competitive stance as a nation." He warns that, "Intellectual property laws, especially in Asia, are not as robust as in the United States. Companies have limited legal recourse to deal with it."

Can Take-in Village raise your kids better and for less money than you can? While they may have experts, you have the experience and personal caring that will, hopefully, be a solid foundation for your childrens development. Put simply, you know your kids; they dont.

Can an outsourcer handle your IT functions better and for less money than you can? In some areas, they probably can, but at what point are you letting the idea of saving a few bucks undermine your companys long range stability? Put simply, you know your company; they dont.

Make no mistake, outsourcing is a viable and laudable option in the many cases where expertise is lacking or where current IT personnel need to concentrate on other, perhaps more business-critical tasks.

Johnston frames the key problem: "Are [companies who outsource] in the short term driving down expenses at the expense of the economy and their own revenues?"

This is a question each insurance firm must answer for itself. But it is a critical question, and the answering must not be put off a moment longer.

Reproduced from National Underwriter Edition, July 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.