Outsourcing is long-term loss for short-term gain, says study

A new report from the London School of Economics and LogicaCMG highlights how IT outsourcing can create short-term savings but cause long-term loss of control

LONDON – As firms are increasingly outsourcing their IT projects, they are also losing control of them, according to a new research paper prepared by IT and business consultant LogicaCMG and the London School of Economics.

The report, Building Core Retained Capabilities, says that, as firms outsource more to save costs, they are retaining only a limited pool of technical IT talent, and not enough of the managerial and interpersonal skills they need to maintain control over their IT projects.

Leslie Willcocks, a professor at the London School of Economics and lead-author on the white paper, says: “In 15 years of research, we have found that organisations are continually faced with a key challenge – what needs to be outsourced and what needs to be retained? We have found a link between the lack of investment in core in-house capabilities and the disconnect it creates between the outsourced function and the retained portion of the enterprise.”

The researchers estimate that, by 2012, 58% of corporations’ IT budgets will have been outsourced. The consequence of the drive for short-term cost reduction is a lack of a longer-term ‘invest to save’ strategy to safeguard future IT operations.

“The report highlights that all too often organisations under-invest in building core capabilities due to cost. The result is that they miss the chance to pre-empt problems by not having a workforce with the capability to perform at the levels needed to maximise success and achieve an optimal cost-effective outsourcing arrangement,” says Martin Blackburn, chief executive of global service delivery at LogicaCMG.

“Core retained capabilities enable organisations to achieve governance, control and flexibility in outsourcing arrangements, whilst mitigating against risk – a tried and tested way for organisations to keep control of their IT future,” he adds.

Instead, firms might find that, lacking in internal leadership, they lose control, receive inadequate service and require constant contract renegotiations for their IT projects.

The report outlines nine core capabilities emphasising a broadening of skills from the merely technical to inter-personal and business acumen, promoting long-term strategic performance in firms’ IT outsourcing.

These requirements include leadership, business systems thinking, relationship building, architectural planning and design, informed buying, requiring an end to short-sighted outsourcing and the foresight to spend to save.