The Real Savings From IT Outsourcing

Recent research offers insights into how companies can use IT outsourcing to generate substantial savings — in non-IT areas of the business.

These days, it is rare for a business not to outsource some part of its information technology function. According to the IT research and advisory company Gartner, global spending for IT outsourcing was projected to reach $287 billion in 2013. What’s more, the growth of cloud computing may make IT outsourcing even more common.

For many companies, reducing operating costs is a key goal of IT outsourcing, but not all companies realize such savings. One reason managers may not realize the expected gains from IT outsourcing is that they narrowly focus on only their IT costs. However, our research suggests that outsourcing IT can also help to reduce other expenses such as sales and general and administrative costs, which are often four to five times IT costs. When managers think of IT outsourcing as a mere substitute for internal IT investments, this narrow focus hides many potential cost benefits.

In our study, based on data from approximately 300 U.S. companies over the 1999-2003 period, we found that a $96.14 million increase in IT outsourcing spending by a company was associated with, on average, a $121.14 million drop in operating costs in other, non-IT functions at the company. (Detailed findings from our study were published in the March 2013 issue of MIS Quarterly. See “Related Research.”)

We also found that IT outsourcing is not a substitute for internal IT investments, especially investments in personnel. Although outsourcing was associated with a significant reduction in non-IT operating costs, that reduction in non-IT operating costs was greater for companies that made higher levels of internal IT investments. We believe this is because IT outsourcing can increase the operational efficiencies of existing processes and free up resources, thereby allowing resource reallocation. Furthermore, companies’ complementary internal investments in IT can make business processes more information-intensive and facilitate coordination with vendors, thereby magnifying outsourcing’s cost-cutting effects.

An intriguing finding from our study is that among the various components of internal IT investments (hardware, software, employees, etc.), only investments in employees have a synergy with IT outsourcing in reducing non-IT costs.

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3 Comments On: The Real Savings From IT Outsourcing

  • Alleli Aspili | January 5, 2014

    Interesting findings from your team! These will definitely help companies decide whether to outsource IT or not… I agree on your point about the parallelism of cloud computing and IT outsourcing – both go hand in hand, and their trends will continue to go up, especially when companies have realized the full benefits they can get from outsourcing.

    On the other hand, I’d like to share our recently published article about IT outsourcing: It tackles about Infosys’s latest visa fraud settlement and how IT outsourcing customers can learn from it. Hope you and your readers will like it as much as I liked this study. :)

  • THAMSANQA MWELI | January 23, 2014

    Very insightful findings and consistent with an anecdotal evidence on cloud computing and IT-outsourcing in healthcare, and yes I also anticipate an upward trend in benefits. Cloud computing particularly in healthcare would offer added benefits such as more elasticity on your IT-investments through virtual networks. A word of caution to IT-Managers is emphasis on IT-strategy and measurement metrics for both tangible and non-tangible benefits

  • George Todorov | July 15, 2014

    Bulgaria is becoming an increasingly attractive outsourcing destination with a lot to offer in terms of skills and expertise and a lot of additional advantages like Internet infrastructure (Bulgaria ranks second in the world in terms of global Internet speed with average speeds of 1,909KBps) and access to EU markets. I recommend you to read IT outsourcing Bulgaria: Overview and advantages: If your company is within Europe, the nearshoring advantage is that you can easily manage the outsourcing process by making regular meetings with our outsourcing partner in person and ensuring you are on the same page.

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