Hidden costs of outsourcing

One of the more balanced articles on outsourcing I've seen, highlighting some of the hidden costs that companies often don't correctly factor into details. If you're going to outsource you need to invest in it long term (to service your needs you will need a vendor who truly understands your business, which is often not trivial) and you will need to set up a layer of management to co-ordinate with the outsourcing vendor for day-to-day activities (do I hear "Scrum Vendor Master"?).

Precisely half of companies rate their outsourcing efforts a success in InformationWeek Research's recent survey of 420 business IT pros. Yet, a third are neutral, and 17%--nearly one in six--call them disasters. That range should give pause to anyone looking to outsource IT or a business process for easy money. Companies also had better be prepared for the possibility of taking work back in-house, because it has become commonplace. Half of companies in our survey have done so, 23% on a major project...

Outsourcing carries a long-term, big-ticket financial commitment, so major deals need board-level scrutiny. Just like building a new factory, they can outlast the executives who broke ground...

Walking away from a deal early can cost a company dearly unless it can prove that the outsourcer was failing to live up to key terms in the contract...

The aftermath of a failed outsourcing agreement isn't limited to the financial impact. It can seriously damage a company's day-to-day operations...

Companies aren't shy about taking back work from outsourcers if a project gets off track. One-quarter of 25 large companies Deloitte Consulting surveyed last year had brought functions back in-house after realizing they could do the work themselves more successfully and at lower costs. Forty-four percent said outsourcing didn't save any money. Nearly half identified hidden costs as the most common problem when managing outsourcing projects. In InformationWeek's survey, poor service and lack of flexibility are cited most often for failures, by 45%, and 39% point to hidden costs. The Deloitte study concludes that companies embrace outsourcing to cut costs, simplify projects, and tap expertise not found in-house. But many find outsourcing actually introduces unexpected com- plexity, adds cost and friction, and requires more senior management attention and deeper management skills than anticipated...

Broad buy-in is vital but so is a single point of buck-stops-here accountability...

Increasingly, offshoring is just one more variable to manage, since so many projects have some overseas component. Cost cutting is the overwhelming reason companies look offshore. Companies also need to moderate their expectations when it comes to offshoring, warns Worldspan CIO Sue Powers. "It's like a bell curve," she says. "Some projects will go well and others will be difficult. Most are somewhere in the middle."...