Larry Ellison wants customers to outsource their entire IT departments to Oracle. Maybe I’m wrong, but I can’t help thinking this might be a bad idea.

His comments, made recently at AppsWorld, went on to promise that, if outsourced to Oracle, the costs of running those IT departments would decrease by at least five per cent per year, annually for the next five years (see story on page 3).

This sounds great in theory. With companies looking at ways to save money and ways to avoid laying people off, while still having access to skilled workers, this kind of cost-savings would be a boon indeed.

But when I read this story, I couldn’t help wondering why a company would want to outsource its entire IT department to Oracle – or to any other large vendor at that. Wouldn’t that give up too much control to a third party? Would that vendor in question be able to devote the type of focused services necessary to run the department as well – or better – than that company itself could internally?

So, not trusting my instincts at all, I posed the question to a friend of mine, an independent consultant who shall remain nameless, who spent years in charge of various outsourcing projects. My question: “Would you ever consider outsourcing a complete IT department to a vendor such as Oracle or IBM or HP?”

After he stopped laughing, he managed to say no, he wouldn’t consider such a thing, and for a few reasons.

First, he didn’t think outsourcing to a vendor was such a good idea, because, despite promises of hardware and software agnosticism, the vendors in question usually still have a vested interest in selling you products, and almost always know their own products best. In other words, the vendors may end up having you by a rather delicate part of your anatomy (I’m paraphrasing here).

That may seem a little paranoid to some, given that companies outsource to big vendors all the time. IBM, for example, announced a seven-year contract with Amtrak just last month, which the company says will save them about US$85 million. So that kind of thing is nothing new, and nothing particularly unusual.

My friend the consultant was also pretty skeptical about how any cost savings were actually being measured. Are you saving in one way, but spending in another – will the project take twice as long as it would have if you did it in-house? It’s possible, he said, that the outsourced project will end up costing more – because everything is a fixed price, and taking longer – because every proposed change may turn into a contract negotiation.

It’s easy in an economic downturn to be seduced by promises of cost-savings. But if saving money is your number one reason for outsourcing, perhaps you should think twice. According to one analyst with IDC, companies should outsource in order to better concentrate on their core competencies, and the decision to outsource should always be a strategic one rather than a cost-saving measure. And Gartner Group recently released a study stating that at least 80 per cent of major outsourcing deals fail to achieve their original business objectives, and are terminated or significantly restructured before the contract period ends.

These are sobering statistics. Another study, this one by Accenture, found that many Canadian executives are wary of outsourcing because they worry that too much of it may result in a radical shift in their business culture. And that’s not even something that you can really put a price on.

So, before you decide to outsource, you shouldn’t just look at how much it will save you – but also ask yourself how much it might end up costing you.

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Jim Love, Chief Content Officer, IT World Canada

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