Companies Need a Better Grasp of Outsourcing Costs

Enterprises are attempting to cut costs by outsourcing, but the price tag associated with the evaluation of a transition from internal to outsourced IT delivery can spiral out of control, according to a recent study by research firm Gartner. The report, "Weigh the Costs of Moving to Outsourced Service Delivery," states that evaluation and selection of an external service provider (ESP) typically ranges from 2 percent to 5 percent of the projected annual price of the outsourcing deal. For companies thinking about hosted CRM or outsourcing call center capabilities, this evaluation step is crucial. Gartner analysts say deals that are technology-intensive tend to have much higher transition costs than those that are not. In a data-center deal, for example, transition costs can range from 5 percent to 15 percent of the annual deal value. However, the transition costs in a less technology-intensive deal, such as help desk, are in a lower range, from 2 percent to 5 percent of the annual deal value, because there is little in the way of capital assets or software transfer involved. Richard Matlus, research director for Gartner's sourcing group, says that while there are substantial costs involved in moving to outsourcing IT service delivery, they pale in comparison to the overall annual value of the deal. "Making the investment required to get it right the first time is clearly minor compared to the risks and costs associated with a suboptimal deal," Matlus says. He adds that to reduce the risk and costs of suboptimal choices and deals, businesses might hire an external, independent advisory firm to assist evaluation. An experienced advisor can expedite the process, provide better quality results in the ESP selection, and improve the odds of a successful deal. Typical costs for full advisory support through the vendor selection and contract negotiation phases range from 1 percent to 2.5 percent of the annual cost of the deal, Matlus says. Michael Andersen, vice president for Gartner's strategic sourcing solutions group, claims that leveraging the expertise of an experienced advisor can reduce internal staff costs and the external legal fees by as much as half. "Transition elements are another example of where an advisor is key. Third-party verification and validation on transition planning and management can reduce the risk of unplanned timing and cost issues," Andersen says.