Sunday, April 04, 2004

Unsure About The Cost Of Outsourcing?

Outsourcing non-core business functions is now a common occurrence in many industries, allowing a company to:

focus its effort on core competencies;
budget effectively;
reduce risk.
Even though organizations outsource many non-core functions, it is nonetheless a strategic move and, perhaps, the IT function is one of the most fundamental and complex elements to go through the outsourcing process.

IT is often the enabler for a company to operate and so it will seek assurances that outsourcing is safe, effective and efficient.

As well as the monetary aspect of the outsourcing deal, there are other important factors that need to be addressed of which both the supplier and buyer of such a service need to be aware.

Service Level Agreements

The level of control that a buyer has over their IT function once it has been outsourced can be a cause for concern.

Fears surrounding this can be substantially reduced by working with a strategic outsourcing partner who understands the organization's business model and through service level agreements can provide the confidence that goes along with a known, defined service, agreed rewards/credits for over-/under- performance as well as fully defined processes for managing the outsourced server environment.


A view often held in the initial stages of considering outsourcing is that it appears cheaper to keep the function in-house.

However, the truth is that outsourcing can reduce costs and provide a monthly budgeted figure for the service.

The real key to assessing whether outsourcing the IT function is cost-effective for your business is to look at the total cost of ownership (TCO).


Much has been written about TCO for various platforms and in comparing one platform against another. When considering whether to outsource, the issue is not how one platform compares against another, but in how to calculate the total cost of ownership of your IT environment.

Many companies specialize in providing models and software to calculate TCO - Gartner, Forrester, Aberdeen, etc, all provide this service.

And yet, actually arriving at an accurate figure is notoriously difficult to accomplish, but that does not make it a worthless exercise.

Begin by using a TCO model that works for your enterprise - the diagram below shows the Gartner Group's TCO Lifecycle Model.

Calculating TCO is more than just asset management and concerns more than just basic hardware / software costs.

Compaq reports that "organizations reduce IT lifecycle costs most effectively when they make three complementary investments: training people, streamlining processes and acquiring technologies that are easy to manage, service and support".

This shows that to understand the true TCO for an IT infrastructure requires an understanding of people (training of both IT staff and end-users), of processes (calculating the cost of carrying out tasks such as backups, asset tracking, change management) and technologies that reduce the manual effort required to manage the environment.


Calculating the total cost of ownership should be done on a regular basis; this ensures that changes made in a bid to reduce the TCO have been effective.

Carrying out such a task will show the real cost of IT provision and may well be higher than first imagined once all the elements have been researched.

Once complete, however, improved decision-making can be expected and comparison against retaining the IT function in-house versus outsourcing can be achieved on a far more level playing field.

The Common Myth

It is a commonly held belief that the majority of IT costs are in the purchase of both the hardware and software. However, by carrying out a TCO analysis it becomes apparent that the majority of costs within the lifetime of the IT environment are the ongoing costs of providing a service.

Another area often overlooked is unplanned downtime and this is important especially when considering outsourcing. If your business does not have a dedicated IT team and a fully redundant server infrastructure, then downtime due to power or server failure could be protracted.

Naturally, any unplanned downtime is likely to be not only disruptive but also costly to your operation.

An outsourcing partner will be able to provide a safe environment for your server(s) with backup power and communications, as well as proactively monitoring your systems to prevent problems occurring before they have any impact.


The provision of a secure environment should also not be neglected when deciding whether or not to outsource.

If you deal with sensitive information - financial and/or confidential personnel data, for example - then the peace-of-mind from knowing that the server is within a safe and secure environment also needs to be factored in.

An outsourcing partner will be able to leverage their existing infrastructure and provide economies of scale that cannot be achieved by most organizations.


If you are unsure whether outsourcing provides a cost-effective solution for your company, look closely at your current TCO and then talk to some likely outsourcing partners.

Remember to include both direct and indirect costs and that the majority cost of service provision is not in the initial purchase of equipment but in the ongoing maintenance and support of that environment.