Are Cost Savings in Outsourcing a Myth?

Tom Hickey, president of Executive Technology Consulting LLC, shares some useful tidbits in his ComputerWorld article, “Outsourcing Decisions: They're Strategic.”

He makes the common-sense point that short-term cost savings in outsourcing deals are often mythical — and that senior management disengages from the details of sourcing decisions at their peril.

Here's what he says on cost:

The drive toward outsourcing is often motivated by financial considerations — for example, to reduce capital requirements and long-term operating costs. Offshore outsourcing meets these objectives, at least superficially and in the short term. Initial cost differentials of approximately 40% are often cited as a major factor in relocating business processes offshore.

This differential can be significantly eroded, however, as you incur additional costs to manage and administer these outsourced functions. While the provider is responsible for managing daily operations, you, the client, must set up governance processes that effectively measure and monitor service levels. If the provider's employees lack training, problems with quality and schedule-delivery may surface. Furthermore, initial cost differentials will likely erode as Third World workers seek to raise their living standards through higher wages and benefits.

Security, business stability, political and cultural issues, and business continuity get similar treatment.