New Study: IT Outsourcing Not All It's Cracked Up To Be

This may be a bit of good news for economic developers in developed nations like the U.S. and Western Europe.

Outsourcing IT work is increasingly popular, but it doesn't necessarily result in cost savings, according to a report from a market research company.

Nearly 20 percent of companies that farmed out IT work did not achieve any cost reductions, while 9.2 percent experienced an increase in costs, according to a survey by people3, a Gartner company.

In addition, just 21.1 percent of the survey’s 76 respondents reported a cost savings greater than 20 percent as a result of their IT outsourcing efforts. Gartner published the results Monday.

"There's an assumption by many companies that they can save a large percentage of their budgets by outsourcing some or all of their IT capabilities, however the true savings are not always as promising as one would expect," Lily Mok, a consultant at people3, said in a statement. "Many companies often neglect to factor in all costs associated with managing the outsourcing engagements, which average 4.5 percent of the total contract value and can be as high as 15 percent."

IT outsourcing means shipping out work such as data center management and application development to an outside company, often one that handles the work in low-cost countries outside the United States. Giga Information Group has predicted that IT outsourcing to India would grow by 25 percent this year. The trend has been criticized, primarily by U.S. tech workers who stand to lose their jobs.

Whether outsourcing makes sense from a business perspective also has been questioned before. Earlier this year, Gartner cautioned that half of IT outsourcing projects will be considered unsuccessful in 2003 because they have not delivered the expected value.

The people3 study said companies that outsource can experience a rise in costs for the time and effort spent during the transition period, disruption in work processes, increased turnover of IT employees who possess critical skills and lowered employee morale.

Source.