Outsourcing isn’t what it used to be.

As recently as two years ago, large companies were handing over their IT operations, lock, stock and barrel, to large, do-it-all, outsourcing firms in deals often worth many millions of dollars. The argument was that if IT wasn’t an organization’s core competency, the organization was wasting time and effort that could be better spent elsewhere. Handing off IT to an outsourcer that specialized in IT would ultimately save money for non-IT focused outfits.

Now though, companies are taking a sober second look at the outsourcing model. A recent study of 25 large organizations with a combined US$50 billion in outsourcing contracts by Deloitte Consulting discovered many firms, unhappy with their outsourcing experiences, were bringing their IT operations back in-house. Seventy per cent of the organizations surveyed said they had negative outsourcing experiences and nearly half had failed to see anticipated cost savings.

What happened?

Part of the problem may have been unrealistic expectations. Companies thought if they handed off their IT, they’d improve their efficiency and save money. In many cases, the study, titled “Calling a Change in the Outsourcing Model,” found outsourcing actually lowered efficiency because it added another layer of complexity. Sixty-two per cent of the companies surveyed by Deloitte said there was a larger management drain than expected because of outsourcing and more than half said they were unable to free up internal resources for other projects as they had originally hoped.

A second problem may have been the expectations of investors. In the wake of the stock market meltdown, companies were encouraged to trim expenses any way they could. Investors assumed outsourcing IT functions would save companies money and generally rewarded any large IT outsourcing deals by driving up the stock price of the company handing off its IT.

IT outsourcing, despite its disappointments, won’t die off altogether. Where outsourcing came up short the most was in complex, customized implementations. Outsourcers didn’t have the resources to handle all of the unexpected and unfamiliar problems they ran into.

Plain vanilla, commodity services are something that outsourcers can still do a good job of providing.

Another area where outsourcers can shine is in disaster recovery. Only the largest of companies can afford to hire their own disaster recovery experts and create fully redundant, geographically diverse facilities.

The bottom line is outsourcing is as much about managing expectations and communications as it is about managing IT. If both the enterprise and the outsourcer understand this, then they’ve taken a significant first step to forming a successful relationship.

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