Economy Creates Shift in Outsourcing Rationale

Officials from Computer Sciences Corp. (CSC) recently announced they were awarded a $106 million outsourcing contract. In other news, public reports have determined that outsourcing is at its lowest level for six years, while a separate report found that an increasing number of high-end IT jobs are being outsourced to India.

Focal Points:

• Executives from CSC recently announced that they had signed an IT outsourcing contract with jet manufacturer Eclipse Aviation Corp. The deal is set for five years, with an optional for three additional years. The total value of the contract for the eight years is $106 million. According to the terms of the contract, CSC will be responsible for application development and maintenance. Additional infrastructure responsibilities will include desktops, midrange computers, help desk operations, security, voice and video communications, servers, and network services. One of the criteria Eclipse officials had was getting an outsourcing company that had experience and resources to support their use of SAP.
• Recent published reports have cited that IT outsourcing services are at their lowest level in six years. In addition, the adoption of IT outsourcing services by business has slowed dramatically in that last three months. Research from TPI has shown a reduction in the value of outsourcing contracts throughout EMEA, with the number of contracts signed dropping by 25 percent. However, officials from TPI also predict that the number of outsourcing deals will increase before the end of 2008. Officials at Equaterra, Inc. have stated the imminent recession is causing some CIOs to delay existing outsourcing plans until they have a better sense of what the future holds. The current crisis is also changing IT managers' rationale for using outsourcing, increasing the emphasis on cost savings.
• Recent published reports have shown that an increasing number of high end jobs are being outsourced to India. Historically, lower skilled jobs such as call-center work have been outsourced to India. According to officials at the National Association of Software Service Companies (NASSCOM), new types of functions are being outsourced there, including publishing work. Estimates from the Economic Policy Institute show up to 18 percent of all jobs in California are candidates for off shoring. Officials from the California Fair Trade Coalition opined that most computer-based jobs are subject to outsourcing, and are pushing for protectionist US trade laws.

Experton Group believes the discrepancy in reporting on the state of outsourcing highlights the uncertainty and volatility in the current and mid-term state of outsourcing. It is clear that a shift in focus in underway to emphasize the economic benefits of outsourcing over the gain in flexibility or migration away from non-core IT tasks.

IT executives should understand that it generally requires around 10 percent of the outsourcing costs to manage the outsource contractor, so any rationale for moving to outsourcing to save money should take these costs into account. Additional costs include migrating to an outsourcer, plus any additional costs associated with auditing, compliance, and security functions.