Outsourcing Survey 2006, Part 2: Why, Where, and Who

We explore why organizations choose to outsource, where they move it, their use of multiple vendors, and success factors in choosing a service provider

In the first part of our series, we explored the results of our 2006 Outsourcing Survey by looking at what was outsourced, how much IT paid, and the length of outsourcing contracts. This week we turn our attention to the reasons IT outsources work in the first place, where they send their work, and the success factors in choosing an outsourcing provider.

Why Organizations Outsource

The primary reason companies outsource their data center functions is what you'd expect: 44% cited "to reduce or control costs," as shown in Figure 5. The motivation for outsourcing doesn't end there. A solid third of respondents also said they do it to gain access to IT resources -- people, processes, and equipment -- that aren't available internally. Three out of 10 also said their organizations outsource to free internal resources or improve business or customer focus.

If you read most popular press on the subject, you might conclude that outsourcing equates to offshoring. That isn't true of our survey respondents. For them, most outsourcing involves hiring a domestic company to handle functions domestically. Eight of 10 respondents told us their primary service provider is a company with its headquarters located domestically.

Of course, just because a company has its headquarters in one country doesn't mean the work is being done in that same country. So we asked a follow-up question about where the work was actually being performed. In 73% of the cases, it was being performed in the U.S. Only 12% said it was being done in India. The remainder -- 14% -- said their work was being handled in another country, though no single country dominated.

However, for one former director of service delivery for IT management at a global port company, going global makes too much sense to ignore. He said:

My previous employer would always do things on a small scale by geographic region. I was part of the team that came to the realization that there was power in numbers. We were underutilizing the power that we had. I was pushing with my peers overseas to stop getting into domestic agreements and look wider scale -- to get more into global agreements because it would be more financially advantageous to the entire organization.

The decision was made easier by having HP, a global operation itself, as one of its primary vendors. "You carry much more weight when you approach them as a global entity."

Multiple Providers

The days of working with a single service provider to cover all IT needs are diminishing. According to our results, only a third of organizations are working with one vendor in their data center work. On average, our respondents used three vendors.

In general, companies are satisfied or highly satisfied with the service providers they're working with. Only 14% report being dissatisfied or highly dissatisfied.

The shorter the contract length, the higher the satisfaction: When comparing satisfaction with service providers the organization works with, 62.5% of those with one-year contracts were satisfied or highly satisfied. Satisfaction dropped to 43.8% for those with contracts longer than five years.

Satisfaction was also higher for those working with fewer providers. For those working with just one provider, 76% reported being satisfied or highly satisfied, while the figure fell to 53% for those with three providers.

For future outsourcing work, firms expect to invite bids from an average of six vendors, but only expect to receive responses from five of them.

A preponderance of companies report being neutral, satisfied, or highly satisfied with the number of vendors available to provide the data center work they need performed.

Which primary service providers were most frequently cited? The ones you'd expect: IBM was referenced most often, followed closely by CSC, then EDS and HP, and Sungard brought up the rear of the top five pack. None of the major India vendors -- TCS, Infosys, or Wipro -- registered much in data center work; however, we would expect them to make a bigger showing for application-oriented work.

Selection Success Factors

When selecting a service provider, it's useful to draw upon the experience of those with successful projects. Six in 10 respondents said the most important factor was identifying a partner with a commitment to quality. That aspect was closely followed by price. About half of respondents cite scrutiny of a vendor's proven competencies as important. Only 37% specified technology fit as most vital factor to success. Flexible contract terms, geographic location, and cultural fit were near the bottom of the rankings.

Table 1: Factors in Identifying
Service Provider Fit
Commitment to quality 60%
Price 57%
Proven competencies 53%
Technology fit 37%
Flexible contract terms 26%
Geographic location 23%
Cultural fit 21%
Scope of resources 18%
References and/or reputation 12%
Note: Multiple responses allowed.

One manager of IS for a large global publishing company, which signed a seven-year deal several years ago with IBM Global Services to take over data center operations, said it was obvious that IBM was committed to quality. "The management that came in brought in a series of processes and procedures, and they worked with us to make sure the quality was there," recalls the manager, who declined to be named. "It was fairly simple for them to do that -- they hired all the people who were here. Then they brought in a few people who took over the management role. They've had a few people leave and move and shuffle around. ... But the people they brought in were nothing but quality." When faced with a new person from IBM who had what he calls "the old internal IS attitude: It'll get done when it gets done," the company replaced that individual with others who were more "customer service oriented."

The former port company manager suggested putting price -- albeit important -- before other matters can be a mistake. "It comes down to relationship building. You want to pay a fair price," he said. "If you squeeze a vendor too hard, ultimately you're squeezing yourself. They're going to cut corners. They're not going to be as free with their information. The trust factor is going to start to take a hit. If they feel they're being squeezed into a corner, you are not going to be given the attention that your engagement really does deserve."

Although it was graded less important overall by survey respondents in identifying service provider fit, the manager said references and reputation ranked high for him. To do vendor checks, he calls on his network. "I'm a part of several associations -- the Help Desk Institute, itSMF [IT Service Management Forum]. I go to a lot of trade shows [and] focus groups. I get together with my network quarterly. It's an active approach... If I look to do something in my organization, there's a pretty good chance that somebody in my network has done it already. I want to know the pros and cons. What am I getting myself into?"

During the evaluation process, he advised spending a considerable amount of time evaluating the likelihood that the vendor is going to "be around." "Financial stability of the vendor is very important," he noted. "Who their channel partners are, who they are doing business with from a technology perspective, who are some of their short-term success stories in addition to their longer term success stories."

Next Week

In the conclusion of this series, we examine the success factors for outsourcing projects.

James E. Powell contributed to this article.