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Send  Share  RSS  Twitter  14 Jun 2010

OUTSOURCING: Repatriating Outsourced IT Services - a Good Move or Not?

 





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Outsourcing has become a popular model across the globe, especially when it comes to IT services. Its popularity has been in part due to its cost reduction possibilities, something that became very appealing during the economic conditions of the time.

The global recession compelled organisations to become leaner and save money wherever they could, but as the world recovers many organisations that turned to outsourcing of IT as a way to trim costs have begun to wonder whether they are really getting the touted benefits from outsourced services.

As the economic climate begins to improve, many organisations are now starting to consider repatriating outsourced IT services due to growing confidence that in-house management can be more effective than outsourcing for certain services, and when well-managed, can also prove to be more cost effective.

"One of the reasons for this shift in thinking is the age of many of the outsource contracts. Generally what we see is that for the first couple of years of an outsourcing agreement companies derive the expected benefits and cost reductions, but later on in the agreement organisations may begin to see a reduction in cost effectiveness," says Allan Dickson, Consultant at Compass Management Consulting South Africa.

"This is often because organisations do not take into account the diminishing costs of IT when entering into an outsourcing agreement. The price of hardware and software is always decreasing, but in the pricing of a contract this is not always factored in. So several years into an agreement an organisation may still be paying past prices for IT which now costs less according to market value," he explains.

Another factor that has influenced the decision to bring IT services back in-house is the recent introduction of King III, which provides recommendations for better internal controls, governance, accountability and risk management. With the Companies Act due to come into effect soon, an act which makes many of the King III recommendations legally enforceable, it is even more important than ever for organisations take these recommendations to heart.

"As a result, CIOs are being forced to closely examine the efficiency of IT operations. This has led many to believe that bringing these services back under internal control will be the best way to ensure compliance with King III and the Companies Act, especially in large organisations that have the capacity to handle such services in-house," Dickson says.

Some of the other motivating factors are a greater feeling of control and security by having processes run in-house, and the possibility that by not paying the margins an outsource provider charges, organisations can in fact save money and do things cheaper themselves.

However, before an organisation takes the decision to repatriate outsourced services, there are several factors that need to be considered. From an IT management point of view all companies go through an IT maturity cycle.
Organisations need to understand where they sit in this cycle, as for a less mature organisation without the skills and capacity to bring services in-house, outsourcing may still remain the most cost effective option.

"Another factor to bear in mind is the size of the organisation and the relationship it has with suppliers. Often outsourcers can offer greater economies of scale, and because of their relationship with vendors, can get better pricing which can then be passed on to the organisation that uses the outsourced services," adds Dickson.

It is also necessary to understand the importance of IT to the organisation, how it fits in with the business objectives of the enterprise, and develop a clear understanding of the strategic importance of IT services. This then needs to be mapped against the availability and quality of skills within the organisation. The more complex the IT environment is, the more difficult it is to bring in-house effectively, as a multitude of different applications, processes and technologies require diverse skills that could be difficult and costly to incorporate into the organisation.

"Before taking the decision to move any outsourced services back in-house, conducting a baseline analysis is an advisable step," says Dickson. "It helps to create an understanding of the current IT environment and its complexity and the available skills, as well as what the company currently has in terms of hardware, software, systems, peoples and so on. This in turn will help you to see where you are, so that you can understand where it is you need to go."

Finally, before any decision to repatriate outsourced services is taken, the costs of the transition as well as the additional costs of managing the services in-house need to be calculated.

Transition costs can be significant as the organisation may need to acquire new hardware, new software, new employees with new skills, new software and new licenses. Also it needs to be remembered that for a time, the organisation will have to bear two sets of costs, those of outsourcing and the in-house costs, because it is not possible to simply cut services off and a transfer period is vital. Management of these new in-house services can also cost extra, which needs to be taken into account.

"With all of these factors to consider before an organisation can bring services back in house, it is critical to take a fact-based approach to considering the various angles," says Dickson. "Conducting an internal benchmark test is useful to determine current costs, skill levels and equipment levels, while a competitive benchmark against similar organisations internationally creates a reference group for a relative idea of the market costs and levels of efficiency."

"Because of King III and the impending Companies Act, there is a great demand for increased accountability and better control, which bringing service back in-house can indeed offer. However, before this enormous decision is taken, any enterprise needs to take a fact-based approach, gathering information by conducting analyses, benchmarks and baselines, so that decisions can be based on facts rather than gut feeling or guess work.

In this way, an organisation can ensure that whatever decision is taken is the right one for the business," Dickson concludes.


 
 
 
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