We use “outsourcing” to mean so many things that there is no way it can really be true or practical for all of them. This one term is used in reference to such widely disparate activities as accessing lower-cost labor in Asia and having a Fortune 100 company run your data centers for you. Is it any wonder then that the success rate of outsourcing entire IT functions is vanishingly small?

Let’s start by defining terms and say that “outsourcing” means taking something you are already doing and paying someone else to do it for you. If you aren’t already doing it, then it’s not “outsourcing” but rather “sourcing” or, more simply, “buying stuff from other people”.

There are many good reasons to outsource IT functions. Saving money is not one of them. You may need to manage the migration from one set of technologies to another and need to free up some of your best people from doing maintenance work so that they can focus on the future. In this case, you could outsource the maintenance. You may need to break through intransient organizational or political barriers and lack the internal will to do so. Outsourcing can serve as an interim move that destabilizes the status quo, allowing you to clean out the existing norms, establish new ones, and then bring the operations back in again. You could also use outsourcing to “sunset” a particular system, thereby making sure that it actually gets turned off in a transparent and visible fashion.

In contrast, it is unlikely that you could take a piece of your IT operations, give it to a third party, and have them run it more cheaply than you could, if you are prepared to manage that operation in a tight fashion. They use the same technologies you do, they provide the same services, and they need to make a profit. There are no economies of scale for them to take over your systems such as ERP, CRM and GL, as your systems are unique to your business processes (which is why it took you several years to put each one of them in). How could they possibly do it more cheaply than you could?

The only way is to reduce services, and this is the elephant in the room. Your staff is multiskilled and can work on many things at once. Vendor staff will only work on what you have contracted them to do. You back up your financial systems every day. An outsourcer might only do so once a week. Your desktop support staff roam the halls looking for things to fix. An outsourcer will commit to a finite response time during business hours. Etc. If and when you do enter the outsourcing conversation, make sure you do the work to define current service levels.

Another way an outsourcing vendor works is to use outsourcing as a loss leader for other business. For example, IBM might take on your ERP systems in order to get your back-office business processes. And this, by the way, is where the Easter eggs are buried for both of you. If you want to save money, outsource business processes, not technology. At the business process level, you do get economies of scale because you get forced onto the same systems as everyone else, e.g., payroll and benefits, plus the systems and people all go with it.

Using third parties to get jobs done often makes sense and can save you money and time over doing it yourself. If you are going to open an office in a country where you are not now present, it may make sense to use the services of a vendor already there for helpdesk services. If you want to get a set of applications built and your staff is busy or lacks the skills, it will often make sense to look overseas. If you want to open new offices and don’t want to build data centers and hire staff, it may make sense to look at the raft of cloud computing vendors now coming on the scene. In all of these cases, you are buying capability not now in your organization.

Finally, whether you outsource or simply source, you will need to have on hand skilled staff to manage the vendors as well as processes and procedures to develop and maintain things like specifications and designs. Using third parties requires a greater amount of deliberateness in your actions than keeping it all inside. ###