Outsourcing requires careful planning

Companies looking to outsource some IT functions should plan carefully ahead of time, considering a broad range of issues, to help insure these projects will be successful, according to industry analysts.

Demand for outsourced IT services is rising quickly as more and more companies look for ways to cut their IT costs and improve productivity. By 2007, global spending on outsourcing will top $50 billion per year, according to market analyst Gartner. But not all of these outsourcing projects will succeed. Many outsourcing projects fall apart because companies fail to consider the costs and complexity that are associated with outsourcing.

Deciding to outsource an IT project is a strategic decision for a company and it's important to not rush headlong into a project without proper planning, said Nick Rossiter, a partner at Mithras Consulting Group, which advises clients on outsourcing-related issues.

In June, Gartner released a report that outlined common pitfalls for companies that outsourced IT services. That report identified five factors that companies often fail to fully consider when deciding whether or not to outsource IT functions: cost, productivity, communications, culture, and organizational readiness.

If your company is considering an outsourcing project, Gartner recommended that you start by analyzing the total costs of the project. Don't look just at the difference in labor costs, the report said. Be sure to factor in additional costs for conducting due diligence, communications, oversight, international travel, and training, it said.

That's sound advice, according to Rossiter. "These costs can be greater than the cost of labor," he said.

Since outsourcing costs will not be constant during the life of a project, companies should consider the costs for different stages of the project. Since initial costs are generally highest during an outsourcing project, your company may not realize significant cost savings until one or two years after the start of the project, according to the Gartner report.

It's also important to be realistic about the level of productivity that outsourcing providers can offer, Gartner said. Some companies assume that the productivity of an outsourcing partner will match that of internal IT staff: this isn't always the case. In particular, be prepared for lowered productivity during the initial phase of an outsourcing project.

Throughout the life of the outsourcing project, productivity levels may be affected by staff turnover at the outsourcing provider. In these cases, new staff may have to be trained to fully understand the applications they are working with. "They need time to get really efficient" Rossiter said.

Another key factor to consider is whether your company's senior management has bought into the outsourcing project. Support from top executives is "instrumental" in keeping an outsourcing project on track, the report said.

Effective communication between your company and your outsourcing provider are also important to the success of an outsourcing project.