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A recent Info-Tech survey found that it is possible to reduce IT costs by outsourcing application development, provided that the outsourcing relationship is carefully managed. Application outsourcing can also be used as a strategy to minimize financial risk during uncertain economic times. Learn how to leverage application outsourcing as a tool to both reduce costs and minimize risk.
Cost reduction through application outsourcing is not easy, but it is possible by engaging in strong vendor management practices. Application outsourcing is also an excellent strategy for achieving financial flexibility during uncertain economic times, as it gives IT managers the ability to scale staff up and down as needed.
This research note discusses:
The use of application outsourcing as a strategy to reduce costs.
The use of application outsourcing as a strategy to minimize financial risk during uncertain economic times.
Case studies that illustrate successful cost reduction and minimized financial risk through application outsourcing.
Carefully managing the outsourcing relationship to reduce costs is just one strategy that will be discussed in this research note.
Strategy Point
Recent Info-Tech survey results from 264 respondents representing various industries and enterprise sizes provided detailed information on recent application development and maintenance outsourcing projects. Of the respondents, 89% had completed at least one application outsourcing engagement. This research note uses these survey results to provide guidance on how to reduce costs and minimize financial risk through application outsourcing. The ability to reduce costs is a moderately influential decision factor for organizations considering application outsourcing, with 64% indicating that it was an important motivator. However, only 48% of organizations are actually successful at reducing costs, and cost overruns are the second most significant challenge encountered in application outsourcing projects (see Table 1).
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Table 1. Cost Reduction in App Outsourcing
Source: Info-Tech Research Group
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Most Influential Decision Factor
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Most Sucessful Goal
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Challenges Encountered
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1. Access to specialized expertise (86%)
2. Faster application delivery (84%)
3. Improve business processes (78%)
4. Reduce costs (64%)
5. Access to headcount (58%)
6. Flexible headcount allocation (52%)
7. Allow IT to focus on more interesting work (50%)
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1. Resource availability (71%)
2. Faster delivery (62%)
3. Knowledge transfer to IT staff (62%)
4. Meeting project budget (62%)
5. Increasing end-user satisfaction (61%)
6. Meeting project timelines (57%)
7. Improving deliverable quality (56%)
8. Reducing costs (48%)
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1. Misunderstood requirements (55%)
2. Cost overruns (47%)
3. Missed milestones (44%)
4. Inadequate deliverable quality (43%)
5. Vendor selection (32%)
6. Cultural and language issues (24%)
7. Interpersonal conflicts with staff (24%)
8. Time zone differences (22%)
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Despite these issues, there are ways to increase the likelihood of cost reduction success through application outsourcing. Managing the outsourcing relationship carefully to reduce costs is one strategy that will be discussed in this research note.
An added benefit of application outsourcing is the ability to reduce financial risk through flexible staffing. In addition to focusing on application outsourcing as a means to reduce costs, organizations should leverage it during uncertain economic times as a means to mitigate the risk involved in hiring permanent full-time staff. For example, instead of hiring and then laying off permanent staff, application outsourcing can be used as a supplement to manage peaks and valleys in demand.
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