Thursday, September 13, 2007


Companies that outsource IT functions save between 12% and 17% of the cost of doing the work in-house, a new report from Forrester Research Inc. finds.

The savings take into account the expense of moving the work to an outside provider, advisor and legal fees, severance for any employees let go, taxes and ongoing management of the deal. Moreover, the discount is conservative, said Forrester analyst Paul Roehrig, because it does not factor in harder-to-quantify benefits that can be accrued in a good outsourcing deal.

"There's additional skills that you would get, technology expertise, predictable delivery costs, none of which is included in these savings figures," said Roehrig, who covers sourcing and vendor management at the Cambridge, Mass.-based firm.

The Forrester study was done in conjunction with TPI, a global advisory firm in The Woodlands, Texas, that specializes in structuring large outsourcing deals. The firm publishes the TPI Index, a quarterly report on outsourcing trends based on data from its clients, primarily global 1,000 corporations. TPI reported that in 2006 it handled outsourcing contracts worth $21 billion.

The Forrester report analyzed data from 53 separate outsourcing transactions handled by TPI from 2003 to 2006. All of the deals include infrastructure management services; 22 also included application services. The savings rate was calculated by comparing the projected internal costs without outsourcing with the total planned cost with outsourcing. The average savings across all deals was about 15%, or about $3.3 billion in total commercial value.

"That's a big number. Even if you're 10% or 15% off, it's still a big number of commercial value that is locked up," Roehrig said. "The other side of the coin is that these outsourcing plays, at this level, shouldn't just be about savings. There are other benefits of outsourcing that have a multiplier effect on the dollars saved. Such as flexibility, such as a market presence in another part of the world, additional skills, technology expertise, all of which is not even included in these technology savings."