Tuesday, 19 July 2022

Does IT Outsourcing Make Sense Financially?

Would outsourcing part or all of your IT operations make financial sense? We talk through the benefits and compromises, so you can make an informed choice.

Is outsourcing right for you? Specifically, would outsourcing part or all of your IT operations make financial sense? The Grant McGregor team talks through the benefits and compromises, so you can make an informed choice.

The decision about whether to outsource your IT operations isn’t only a financial decision, of course. But, as with any major strategic change, you need to understand the financial implications of your decision.

In this blog, we take a look at some of the implications and benefits of choosing to outsource your IT operations.

Why choose to outsource?

According to Gartner research, organisations choose to outsource to access the following benefits:

• Efficiency

• Access to skills

• Redirect internal focus to core business activities

• Innovation

• Modernisation

• Business transformation

We’d add two further benefits:

• Staffing flexibility

• Continuity and risk management

However, the financial motivations remain top of mind for most organisations considering an outsourcing arrangement. Cognizant has found that more than half of CIOs and CFOs want to see return on investment (ROI) within 12 months of agreeing an outsourcing agreement.

How do you determine the ROI of outsourcing?

Calculating whether switching to an outsourcing agreement would deliver ROI boils down to the question of whether the outsource partner can do the task more cheaply than it is currently being done inhouse.

However, to work this out, you’ll need to know four numbers:

• What are the current costs of running the operation inhouse?

• Are there any costs of onboarding? If so, what are they?

• What is the quoted cost of the new supplier running the operations?

• What skills and systems would you still need to retain inhouse even after outsourcing? What are the costs of those?

Together, these numbers will enable you to determine whether you can achieve return on investment within 12 months.

How do you calculate the cost of your current internal IT operations?

The cost of your current IT operations should be a relatively simple calculation:

• Salaries and benefits of each member of staff

• Average staff turnover and associated recruitment costs

• Training costs

• Consultancy costs and the cost of any other external expertise you access over the year

• Auditing costs

• Technology costs

• Project costs and costs of any planned improvements

• Any fixed overheads that will no longer be required once outsourcing is agreed.

You’ll then need to run through the same series of cost analyses for the proposed outsourcing arrangements. Don’t forget to include any costs that are associated with the onboarding process and add these to the outsourcing costs over the year.

The case of the missing skillset

Sometimes, the comparison in service delivery isn’t directly comparable between an IT supplier and the internal IT team.

What if organisation wanted to attain ISO 27001 certification, but the existing internal resource had no experience of delivering this? Or perhaps there is an area – such as cloud migration or cyber security – where the incumbent team are not fully up to date.

How do you calculate the cost benefit of the new IT supplier managing those tasks for you? They aren’t something you could previously have undertaken in-house, but they are going to deliver significantly improved outcomes for the business.

In such cases, it is worth considering the various alternatives. For example, what would be the capability and cost of outsourcing that one function or project? And what would be the cost of recruiting and retaining someone with those skills internally.

Although you might not currently be meeting those costs, they do need bringing into the equation if your new IT partner is going to be delivering on those business needs for you.

Considering the indirect and qualitative returns on investment

You might be surprised to know that the Cognizant survey(1) that found that more than half of CIOs and CFOs want to achieve ROI within 12 months on any outsourcing agreement, their sentiments aren’t matched by their efforts to measure ROI.

Fewer than half of those surveyed said they had even tried to quantify the financial contribution of outsourcing to their business.

Perhaps this is because of the difficulty of measuring some of the benefits gained. While total cost of ownership (as itemised above) is a relatively straight-forward measurement, the ongoing value of process optimisations, reduction of risks and value generated through innovation that otherwise wouldn’t have been made possible is harder to quantify in either the “before” or “after” columns.

Risk offers some quantifiable factors: for example, the cost of any non-compliance when managing internally vs. the assurances of your outsource SLAs and/or the recompense in expenditure as a result of non-conformance with SLAs.

Process optimisation may also offer some quantifiable benefits: could we deliver the project inhouse? What are the expected results?

Innovation is less certain, but worth considering within the broader overall picture.

To outsource or not to outsource?

It may be that you can justify the decision to outsource IT purely on a cost of operations basis. However, even if this is the case, it is worth considering the other returns that outsourcing can deliver.

For some of our customers, a reduced IT spend is far from the primary motivating factor in their decision to outsource. Often, the need to reduce business risk is a greater priority. Other times, the need to build greater resilience and business continuity is the number one reason to outsource. Or the need to access specialist skills, such as in cloud or cyber security.

Whatever the primary driver, it is important to do the sums on ROI – both to help you build the case internally and to assist with business and financial planning.


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1. https://www.ft.com/content/40852f6c-a9e7-11de-a3ce-00144feabdc0