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IT spending

Revealed: Four Tips to Lowering IT Outsourcing Costs

What is the key to lowering outsourcing costs? John Reeves, director of IT Research for the Hackett Group, isn’t certain – but he has some pretty good theories (which will be explored more fully in upcoming Hackett Group research). A study published last month found that IT organizations that Hackett Group categorizes as world-class spend 15 percent less than typical companies per end-user, including 25 percent less on labor, 9 percent less on technology and 8 percent less on outsourcing.

To determine which organizations outperform their peers, the firm analyzed benchmark studies performed at over 100 Global 1000 companies over the past few years. World-class IT organizations are those that achieve top-quartile performance across more than 60 efficiency and effectiveness metrics in The Hackett Group’s IT benchmark.

Reeves said he thinks IT organizations are lowering their outsourcing costs through “a fundamental shift in the way they handle supplier relationships.” Multi-year, single-supplier outsourcing contracts are largely a thing of the past, he said. “Now we see mostly smaller deals with multiple suppliers. They turn over quicker, which means you can refresh your contracts quicker.”

(Many outsourcing experts agree that multi-sourcing is becoming an outsourcing best practice.)

Another contributor to lower costs and more effective outsourcing relationships, Reeves believes, is more sophisticated vendor management, achieved by bringing in professionals with more experience and different skills. “More companies are pulling ex-procurement types into IT organizations,” he said.

In addition to lower costs, Hackett Group found world-class IT organizations meet ROI expectations nearly twice as often as their more typical peers, deliver against anticipated benefits nearly 80 percent more often and automate up to 80 percent more business processes.

Through its research, Hackett Group identified four practices of top-performing IT organizations:

Align IT metrics and formalize communication with the business.

All of the IT organizations surveyed by Hackett Group use metrics to track performance and also communicate with business units. Compared to the more average organizations, however, world-class organizations formalize their efforts.

For instance, 100 percent of the world-class organizations use a performance scorecard, vs. 26 percent of other organizations. And scorecards are regularly reviewed by senior business and IT management at 80 percent of world-class organizations, compared to 39 percent of their peers.

Similarly, 80 percent of world-class organizations have created formal communications plans, clearly spelling out stakeholders, messages, frequency and methods of contact, as well as accountability. In contrast, just 30 percent of other organizations have done so.

Standardize applications and process methodologies

World-class organizations have 13 software applications per 1,000 end-users, vs. 22 apps per 1,000 end-users at peer organizations. Reeves said may IT organizations shy away from software customization at all costs, sometimes installing multiple software-as-a-service (SaaS) apps to avoid it. The better approach, he said, is to standardize on as few software platforms as possible and allow customization within those platforms.

“You want to have one CRM platform, not four or five CRM platforms,” Reeves said. “The perception is that any and all customization is expensive. It can be, but it is sometimes worth it, particularly when you talk about regional differences.”

For example, he said, global organizations will typically be more efficient if they use a single ERP system and customize it to accommodate different languages and currencies, rather than using different ERP systems in different regions.

Integrate end-to-end business processes

World-class organizations prioritize integration between applications more than their average peers, Hackett Group found. For example, 60 percent of world-class organizations reported a high level of integration between purchasing and accounts payable apps, compared to 41 percent of other organizations.

In fact, almost all world-class organizations in Hackett’s research said they had medium or high integration between applications used in their end-to-end finance processes.

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Monitor business and IT outcomes

Among the most important outcomes to monitor are those involving enterprise architecture, Hackett Group found. The key, Reeves stressed, is to monitor progress toward architecture goals regularly rather than just at the outset of major IT projects.

Another key difference between world-class and more average organizations is accountability. Sixty-seven percent of the top performers make both the IT project team and owner of the project on the business side accountable for outcomes, vs. just 13 percent of average peers.

The research is available to members of the Hackett Group’s advisory programs. A public excerpt of part of the research is available for free by registering here:


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