Friday, February 12, 2010

How to minimize the hidden costs of IT Outsourcing

The major goal of IT Outsourcing remains cost reduction. However, this brings unexpected investments far too often. Companies who are willing to outsource should not underestimate hidden costs as well. What follows are the most reasons for increased budget.

  • Vendor selection. The clear vision of what needs to be achieved would help a lot. Which processes are to be performed offsite? What model of work would suit the best – is it project-based IT outsourcing, or hiring dedicated resources
  • Hardware and software for distributed development. The internal software development processes will need to become more mature, through the implementing of certain processes, artifacts and communication tools. It is better to invest in effective tools for the distributed development, rather than have delays or bad quality in the future. 
  • Knowledge transition. The initial stage of IT Outsourcing may be performed in a cost effective way – such as specifications writing, conference calls and online meetings. Nevertheless, especially for larger projects, costs invested in on-site visits prove to pay off. Making offsite workers spend time together with the onsite team to study the project environment in-depth reduces the miscommunication quite a lot. 
  • Cultural, language, time differences: to increase the interaction efficiency and to avoid misunderstandings it is useful to evaluate the level of mutual understanding already during the vendor selection. 
  • Layoffs: to avoid this, assign new roles to the staff. These roles may be related, for instance, to the management of the distributed development process.
  • Support: to be independent from the service provider, ensure that on-site staff interacts closely with the off-site team and is up to date with the developed product. Another way to avoid additional support spending is to negotiate with the service provider the technical support as well.

IT Outsourcing requires additional costs for management and for the interaction. As Hank Zupnick, CIO of GE Real Estate, says in the article "The Hidden Costs of Offshore Outsourcing, "You can't expect day-one or even month-six gains. You have to look at offshore outsourcing as a long-term investment with long-term payback."
What costs has your company experienced that were not overseen from the beginning? How can these costs be avoided?
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