IT outsourcing is a constant source of debate. Ovum recently suggested, adding to it that the Government should outsource IT to India. The initial appeal of offshoring to India is undeniable – the low costs of land and labour would greatly benefit a Government that is battling to cut costs, with reduced budgets and reduced staff numbers increasing the pressure.
However, while the initial reduction in costs may seem like an opportunity too good to pass up, this is not a decision the Government should take lightly. IT outsourcing contracts need to be thoroughly scrutinised, especially as many contain hidden costs that may eventually cancel out any initial savings.
Research carried out by Vanson Bourne found that 3 out of 5 UK businesses failed to consider the ‘hidden’ costs of offshore outsourcing. The result is that 75% of those organisations have been disappointed by the quality of offshore outsourcing. In the current climate, the Government simply cannot afford to make anymore financial mistakes. It is therefore crucial that any outsourcing decisions are considered carefully and that long-term, as well as short-term, factors are taken into account.
The Hidden Costs
For many organisations, whether in the public or private sector, making immediate cost savings remains the number one concern when looking to outsource. However, focusing only on a daily cost approach is dangerous, particularly if choosing to outsource IT projects abroad, as businesses will often look to outsource to the regions with the lowest costs, ignoring things like quality and business innovation.
The hidden costs associated with travelling to the sites, management time spent out of office while visiting far-off regions all have an effect on overall cost-savings. The same of course can be said for potential complications that are impossible to predict, such as airport strikes and the recent ash cloud fiasco. All of these issues cost money and mean the Government would end up spending far more time and money than it intends to.
Although it’s easy to see why the initial short-term cost savings would be attractive, such benefits aren’t necessarily enough to sustain long-term success or cost efficiency. In the long-term, time and money spent on issues like travelling to and from the sites will result in greater costs and lost productivity. Therefore, the short-term benefits are greatly outweighed by the longer-term buried costs.
Data protection is increasingly important for all industries. If you're outsourcing within the EU, data is protected by the Data Protection Directive which means a business' data cannot be shared by a third party - for example an outsourcing provider. However, there have been high profile data losses in non-EU offshoring destinations which are not governed by such laws. Any business considering outsourcing should take every step to ensure they will not encounter any expensive legal ramifications later on in the outsourcing project.
An extreme example of this can been seen just a few years ago when a Sun reporter succeeded in buying the bank details of 1,000 British consumers from a computer expert who claimed to have corrupt call centre contacts in India.
Although unrelated to IT outsourcing, the issues faced by organisations looking to outsource are the same. Whilst in Europe there are restrictions as to what data can be transferred or stored, many other regions have no such regulations at present. They instead rely on individual contracts negotiated between the main company and the Indian outsourcing contractor to address the data protection issues.
The kind of data the Government has in its IT systems is extremely valuable, so while data loss would be an issue to any organisation, for the Government, any mishaps would be absolutely catastrophic.
Plugging the skills gap
While many traditional outsourcing regions, such as India, are experiencing the skills-shortage Gartner warned of a couple of years back, European countries such as Spain offer a high number of skilled workers. For example, almost 20% of 25-64 year olds in Spain are IT graduates, who have gained real world experience whilst studying, due to close links between universities and local businesses.
In addition to the plethora of skilled staff available, outsourcing nearer to home relives the problem of long-haul trips to different countries, it’s a more efficient way of managing both time and expenditure – something the Government is very keen to keep in check given last year’s media circus.
Although offshoring may bring about ‘quick wins’, the real value is short-lived and it fails to offer any real benefit to a global outsourcing market trying to prove its worth as budgets become available post-recession.
At a time when any financial mishaps in the economy would have dire consequences, the Government should ensure that they have weighed up the short-term costs of nearshoring against the longer-term hidden costs of offshoring. Only then will the UK benefit from the cost savings brought about by efficient IT outsourcing.
Daniel Naoum is co-founder, Valueshore