Offshoring IT – the bottom line

Alan Pelz-Sharpe, Vice President Software and Services

The current enthusiasm to outsource IT functions to offshore locations, is driven almost entirely by the desire to cut bottom line costs. Organisations that are taking this route usually have a clear idea of what their current and projected costs for IT spend are. But as for precisely ‘why’ their organisation is spending the money, and exactly what value it is bringing to their operation is seldom so well understood.

A recent survey in the US conducted by CFO magazine of 262 CFO’s and senior finance executives revealed that 60% believed that IT will be a source of competitive advantage to their company. Yet less than 35% thought that applying some kind of economic analysis to IT investments was essential. Added to this was the fact that over 70% of the CIO’s answered No, when asked if their firms had over spent on IT over the past three years. The question this raises, is how can you know if IT is adding value to your organisation if you are not measuring and monitoring the costs and returns?

It is always possible that the 70% who answered No, regarding overspend are right and that they have spent wisely, but then again how do they know? A CFO who does not use numbers and basic economic value add, as a benchmark for the success or failure of a project is the kind of CFO that should worry you.

When one considers the scale of investment that modern day firms commit to technology it does seem bizarre that the same stringent economic analysis given to other investments is not applied. Instead of focusing on cutting bottom line costs by doing the same things, only cheaper and elsewhere. Firms should be looking more critically and fundamentally at their IT investments, and asking if they should be doing some things at all, and even if they should be moving some automated processes back to manual and customer friendly methods.

Simply cutting the bottom line cost, does little to increase the value of IT to a business; for many IT costs could be eliminated altogether by a thorough audit of IT functions, and detailed measurements of the specific economic values they bring. As the situation now stands, redundant and non-productive operations are often being moved offshore, with reduced operating costs given as evidence of success. Paying for something you don’t need, no matter how cheap, is not a success.

Businesses need to start getting far more inquisitive about the so called ‘intangible benefits’ that are so often cited in business cases. Intangibles such as increased customer satisfaction, or potential loss of competitive edge are commonplace in these cases. Yet whilst such positive intangibles are commonplace, other, less positive intangibles, such as loss of morale, or the cultural complexities of working with non US teams, or simple and practical issues surrounding H-1B visa restrictions are seldom given such prominent visibility in business cases built to support offshoring.

Both sets of intangibles need to be looked at far more thoroughly, for few things are truly intangible. Most things, even if they cannot be measured down to the last dollar can be scoped and forecast with some degree of reality. Yet the effort to do this is seldom made.

Decision making processes regarding IT investments, especially decisions with such a major impact as offshore outsourcing, should be reduced to this:

When any investment is not delivering a sufficient economic return to your organisation you should be looking at more than reducing its cost, you should be questioning its fundamental value. If it turns out to have less value than you forecast for it, then you may have the option of cutting it out altogether.

Of course you can’t even start this exercise until you start measuring the economic returns as well as the costs of IT. Simply passing chunks of your business to India or Russia will not resolve any underlying value issues that your organisation may have. It will simply shift those issues further away from the core of your business, and may ultimately make them even more difficult to resolve.

To learn more about Ovum’s expertise on Europe-wide issues, contact Alan Pelz-Sharpe directly on APS@Ovum.com.