|
Application Outsourcing: Reduce Costs and Minimize Risk |
|
|
|
Wednesday, 08 April 2009 |
|
Page 2 of 6
Key Considerations
Application Outsourcing for Cost Reduction
Leveraging application outsourcing as a tool to reduce costs is not easy, but it is possible. Info-Tech survey results show that larger organizations are more likely to be successful at reducing costs, as well as those organizations that institute strong strategies to manage the outsourcing relationship (see Table 2).
|
Table 2. Factors Influencing Success with Cost Reduction in App Outsourcing
Source: Info-Tech Research Group
|
|
Very Strong Influence
|
Strong Influence
|
Influence
|
|
1. Using third-party help for relationship management.
|
2. Being informed about project status by the outsourcer.
|
3. Viewing the outsourcing relationship as a partnership.
4. Being motivated to outsource to improve business processes.
5. Being motivated to outsource to reduce costs.
|
Keeping the outsourcing project on track through strong relationship and project management reduces the likelihood of cost overruns caused by missed milestones, misunderstood requirements, and inadequate deliverable quality. Organizations that would like to achieve cost savings should manage the outsourcing relationship carefully in order to reduce costs.
Case Study 1: Insurance Company Reduces Costs by 50% through Effective Vendor Management
The CTO of this insurance company focuses on strong vendor management and relationship building in his outsourcing projects. Outsourcing the development of his data warehousing applications has allowed him to achieve a 50% reduction in costs as compared to internal development.
|
Table 3. Factors Influencing Success with Cost Reduction in App Outsourcing
Source: Info-Tech Research Group
|
|
Type of Organization
|
Private
|
IT Employees
|
4
|
|
IT Complexity
|
Moderate
|
App/Dev Employees
|
3
|
|
% of App Budget Outsourced
|
60-65%
|
Revenue Growth
|
15%+
|
|
Type of App Outsourced
|
Customization of packaged applications and development of data warehousing applications.
|
|
Trigger for Outsourcing
|
The CTO believes that in-house development is risky and is not a strategic skill in the insurance industry.
He would rather focus on strategic initiatives involving best practices in project management, business process, and relationship management.
The ability to reduce costs was a factor but not the main driver for application outsourcing. The CTO emphasizes managing the outsourcing relationship as a means to reduce costs.
|
|
How Outsourcing Facilitated Cost Reduction
|
Instead, vendors should be chosen based on their ability to work with the organization as a partner, as well as to actively manage the project and relationship.
For the data warehousing project, he actually chose the most costly vendor based on an RFP, yet was still able to reduce costs by 50% compared to developing these applications internally.
He believes that this reduction in costs was made possible through the use of strong governance and vendor management.
He has a dedicated project manager on his side and key controls in place to ensure that issues are caught quickly.
He also meets with his vendors every six months to discuss business strategy and future goals.
Overall, his outsourcing projects have been highly successful, budgets have been within limits, and outsourcing has allowed IT to focus on strategic initiatives.
He emphasizes that although he was able to reduce costs, cost reduction should not be the primary driver for application outsourcing. Instead, IT managers should focus on creating a strong relationship with the vendor, and cost reduction will follow.
|
|
