In-Depth

New Report Examines Practices, Trends in IT Outsourcing

The Institute of Internal Auditors’ report helps C-level executives understand the risks when navigating the complex task of IT outsourcing.

• By James E. Powell
• 04/03/2007

The Institute of Internal Auditors’ (IIA) seventh Global Technology Audit Guide (GTAG) looks at many of the most common outsourcing risks and their potential strategic impact on an organization throughout the outsourcing lifecycle. Key issues discussed in the report, according to the IIA, include “outsourcing strategy and feasibility; selecting an IT service provider; drafting and managing contractual agreements; ensuring a smooth transition of internal operations to service providers; return on investment; effective frameworks for establishing outsourcing controls; and termination and renegotiation of services.” The guide stresses the importance of evaluating the service provider’s internal controls and “establishing a clear governance structure over the outsourcing activity to ensure accountability and effective project management.”

IIA Manger of Technology Practices Lily Bi says that while outsourcing IT management demands (including systems implementation, maintenance, security, and operations) has grown, the benefits “come with complexities, risks, and challenges. It’s important that executive management and boards understand how to conduct a comprehensive review of an organization’s outsourced operations, evaluate the risk management process, and comply with applicable laws and regulations. Chief audit executives and audit supervisors can use GTAG 7 to help people who have limited technical knowledge to better understand these risks.”

The 30-page document, available as a free download on the IIA’s Web site, describes recent and expected trends in IT outsourcing, including:

• Application development continues to be among the most outsourced IT activities, followed by application maintenance and support



• Though mega contracts over U.S. $1 billion represent a significant share of all outsourcing contracts, they’ll be replaced by deals between U.S $100 million to $999 million soon.



• Contracts are growing shorter; the average length of an IT outsourcing contract declined from 6.2 years to 5.3 years from 2003 to 2005



• Cost savings continue to drive IT outsourcing projects, though those focusing solely on savings haven’t met client and service-provider expectations



• Europe will approach the U.S. market share of IT outsourcing; India will remain the preferred destination for IT outsourcing, but China is expected to emerge as a formidable competitor



• IT providers will become more competitive as clients seek greater levels of domain experience



• More companies are relying on pilot projects to ensure a good fit between the client and service provider; proof of concept projects are used to evaluate providers



• Multi-sourcing will grow, and organizations will need to develop the competencies necessary to manage in this environment

GTAG 7, Information Technology Outsourcing, was authored in partnership with Parthasarathy Ramaswamy, Mayurakshi Ray, and Jaideep Ganguli, with PricewaterhouseCoopers in India. The authors also received input, review, and comments from 37 IIA members, affiliates and chapters, as well as from professional organizations, universities, professionals, and practitioners working in a wide range of industries and positions throughout the world.