Outsourcing Won't Be a Cure-All in 2009

Enterprise IT executives looking to cut expenses in 2009 will consider outsourcing, but industry watchers argue moving from fixed to variable costs could also result in unreliable services, unpredictable outcomes and financial woes.

"Throughout the history of outsourcing, we've seen during the tough times that a lot of these decisions are extremely tactical, short-term oriented and present consequences downstream," says Ben Pring, research vice president at Gartner. "An uncertain economy is not a slam dunk for outsourcers, but some very bad deals can be put in place. It's the ugly truth of outsourcing."

Outsourcing in a tight economy can represent a classic case of "You get what you pay for" to enterprise IT executives, analysts say. For instance, companies looking to squeeze costs out of a contract with a service provider can suffer degraded service levels without too much concern from the outsourcer, Pring explains. Passing responsibility for infrastructure, applications or staffing to a third-party -- regardless of the economy -- leaves the customer vulnerable to the whims of the provider and can make outsourcing a risky proposition in tough financial times.

In the short term the deal may help a company's bottom line, but long term, enterprise companies need high-quality services to better compete.

"Oftentimes, you are going to be disappointed with the level of cost reduction you can achieve in an outsourcing deal, and if that is all you are focused on, inevitably, it will produce a bad deal," Pring says. "Historically customers get lousy quality of service when trying to squeeze an outsourcer. . . . Really the service provider has no incentive to invest in better services or staff for a smaller contract."

The trend toward shorter-term contracts and smaller deals will continue in 2009, according to global sourcing advisory firm TPI, and despite the rush to reduce expenses, contract negotiation cycles have lengthened -- which could benefit both customer and provider.

"One of the big concerns for TPI is that in the angst and rush to judgment, decisions could be made without fully evaluating the risk," says Mike Slavin, partner and managing director for CIO Services North America at TPI. "Once a firm has made the decision to outsource, it is a pretty hard decision to come back from in the short term."

Because economic uncertainty for 2009 has reached a fever pitch, enterprise IT executives need to be smarter than ever about signing services contracts. By no means should companies abandon outsourcing as an attractive option, but when looking to strike a deal with a service provider, enterprise IT executives need to take a step back from the need to reduce expenses immediately and think about IT needs a year or more from now, analysts say.

"It's so tumultuous that there is no clear line of sight in terms of when the end of the upset will come. There is still too much we don't know," says Christine Ferrusi Ross, vice president and research director at Forrester Research. "A lot of clients coming up on renewals are being extremely cautious and taking their time to weigh risks and get the right deal for them."

Analysts advise enterprise IT decision makers to research service providers' financials, product road maps, deal flow and turnover. Outsourcers are not safe from the current economic conditions and may not survive the storm any better than others. "There has to be a big focus on vendor risk and vendor viability. The deal may sound great now, but if the vendor goes south in six months, where does that leave you?" Ross says.

Another key factor to investigate is service levels. Talk to providers' current clients and determine if they have begun to slip on service levels or started to reveal gaps in service, analysts say.

"A lot of these outsourcers are not immune to the meltdown that is occurring; many of the bigger ones have been working with financial services institutions, and inevitably that will hurt even the biggest service providers," Gartner's Pring says.

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