Weighing all cost aspects using the noventum IT outsourcing strategy

„Never change a running system.“ This motto is known to every IT employee. But, what to do when the system does not function perfectly anymore? Customers complain about the lack of quality. The management complains about ever-rising IT costs. An IT landscape that often has developed over years in small steps is no longer meeting the requirements and is up for discussion. Now, the management of IT has to think about changes. But what should be changed? Are small corrective actions sufficient or does it have to be more?

A strategy is needed to meet the complexity of the situation. Acting in a structured manner does, as we know, have the advantage that advantages and disadvantages are weighed quite consciously and the challenges are met quite targetedly.

Executive management must assign weights to the goals of the company before developing any strategy. What are the biggest problems? Which principles should be adhered to no matter what? How much risk can the company afford to take?

In most cases, the primary motivator is simply money. In concrete terms that means: either IT is too expensive when compared to the market, or the company must decrease costs for other reasons. The second „pain point“ quoted most often is quality. Here, much can be wrong. Very often, the availability of services, the speed of implementing new requirements or the quality of support are the topic of critical contemplation.

Management must make a decision if there are problems in several areas. It is hardly realistic to improve everything simultaneously. To increase quality and at the same time decrease costs and increase the speed of implementation is and will remain a dream.

Therefore, priorities have to be set. And it is at this point that strategic planning becomes very concrete. Criteria catalogues help to take the interests and viewpoints of all participants into consideration. For a delayed decision, points may be given out, providing the empirical base for a decision.

To reduce costs is always important, but not always a given

If reducing costs is the predominant goal, significant monetary effects can be realised by utilising synergies and scaling effects in personnel and technology, by standardising and automating processes. If this cannot be done in-house, the question arises whether to outsource to a provider. This is particularly effective when „Commodity“ services such as mail, service desk or even the entire IMACR workstation supervision is to be outsourced to a provider. However, if the company offers very individualised and technically specialised services, then the economies of scale are usually not realisable. Even a provider will hardly offer these kinds of services at a lower price.

Paying only for what is required

By outsourcing, the performance is regulated contractually by separating the service quality into several service levels (e.g. bronze, silver, gold) and adapted to requirements. Therefore, only the required quality is being delivered. The costs for this can be set up to be variable, transparent and plannable.

In some branches of production, availability and fail safety are extremely important. They can be increased to a maximum level by redundant computer centres and systems. Especially in smaller enterprises, the costs can burden the budget extremely if they produce in-house. IT providers, however, very often offer such requirements at considerably lower prices, due to their size.

Turn fixed costs into variable costs

Technology ages, in times of significant technological advances it does so really quickly. Often, this drives the fixed costs of the IT organisation higher than management likes. If, in the course of an outsourcing, the provider also provides the hardware, then the tied-up capital is reduced and the fixed costs are turned into variable costs that can be made to be flexible according to the quality and volume that is required. In particular, when the overaging of the hardware has caused an investment jam and new investments must be made, thoughts going in the direction of outsourcing are obvious.

Finding a balance between IT costs and IT quality

Outsourcing does not always result in reducing costs, in particular if the quality has to be raised at the same time. On the other hand, quality can be improved markedly by outsourcing. Especially when there are concrete deficits, this can be countered here targetedly. However, to [think to] remove internal problems cost-effectively and quickly by outsourcing is hardly realistic. Outsourcing can be successful with respect to quality only by careful planning, implementation and subsequent provider control. Defining and describing the services to be outsourced exactly, selecting the right provider and formulating the contract are first important stepping stones along the way.

Additional costs due to outsourcing

A successful outsourcing requires that the service provider be controlled by the customer. This „provider control“ should be built-in in the company already at the signing of the contract, including the personnel as well as the appropriate allocation of tasks and responsibilities. The in-house set-up and changes in the team, with the „mind change“ that goes with it does, of course, also bind resources that have to be scheduled and budgeted for in-house. Regular reports by the provider which often are part of the contract must be read and potential measures taken as a result thereof. Depending on the average performance, the processes existing in-house must be coordinated with the provider and adjusted.       

Outsourcing causes, in addition to the permanent additional expenditures due to controlling the provider additional, one-time expenditures for the transition or even transformation. Very often, these expenditures are underestimated and cannot be paid for internally. The future provider or other external resources can assume such tasks. But that again is tied to increased costs. Depending on the degree of standardisation and process maturity these costs will figure prominently in the books. Internal processes must be adapted to the new situations and the responsibilities allotted anew. The in-house specialist employees that were replaced must be retrained for new work areas, re-educated or compensated.

Being able to afford expensive new technologies

Very often, the introduction of new technologies fails because such systems are being utilised below capacity. Often, there is no „Return on Investment“ for smaller companies. This can change when such systems are utilised on a pro rata basis at a provider‘s. This means that even in smaller companies professional software distribution tools, ticket systems, load balancers or Intrusion Detection Systems can be used relatively cost-effectively.

In summary

Developing a sourcing strategy helps in making a decision. Whether IT costs can be reduced by outsourcing depends largely on the future demands posed to the IT department regarding the quality required. But the size of the company, the current cost level of the internal IT, the transformation costs and the internal adjustments to the infrastructure and the processes as well as the business strategy must be taken into consideration in the business case. If there are no valid empirical values for all these questions, a relevant scenario or a feasibility study should be undertaken before making any strategic decisions, in order to hedge them.

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