The True Cost Of Outsourcing IT Departments

Running head: THE TRUE COST OF OUTSOURCING IT DEPARTMENTS 1

The True Cost of Outsourcing IT Departments

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THE TRUE COST OF OUTSOURCING IT DEPARTMENTS 2

Companies are contracting IT vendors to undertake functions such as data entry,

development of software applications, data recovery, and managing network-related issues. The

popularity of outsourcing in IT departments has become undoubtedly perplexing in the recent

years. According to a 1999 Global Outsourcing Trends Report, most firms had given 38% of

their operations to vendors with the aim of lessening the overall cost of establishing and

maintaining their IT departments. The true cost of outsourcing of IT departments surpasses the

noticeable IT budget to incur extra costs of selecting a preferred IT vendor alongside transition,

lay off and productivity costs.

To start with, the expenses of selecting an appropriate IT vendor attracts additional 0.2 to

2 percent to the total annual costs. The selection process is accompanied by activities such as

documentation of requirements, response evaluation, and negotiation of contracts which denotes

extra cost. However, the process of outsourcing IT consultants may take a duration of six months

to one year depending on the nature of the partnership. Solli-Saether & Gottschalk, (2010) argues

that company executives and managers have consistently ignored the hidden costs of offshore

outsourcing due to enticements of little savings in the IT department.

Secondly, transition costs constitute a noteworthy portion of the overall cost of

outsourcing the IT department. The transition period spans over a period of 3-12 months before

complete and successful handover of work to a foreign IT vendor. At this juncture, company

executives may be perplexed if they expected savings during the transition process. Instead,

additional expenses emanate from internal and marketing communication, travel costs while

outsourcing abroad and knowledge transfer outlays. Gold (2012) points out that an individual

employee in India under a basic salary of $10,000 per annum may cost a firm in the US three to

six times the amount.

THE TRUE COST OF OUTSOURCING IT DEPARTMENTS 3

A firm may be prompted to lay off its workers after an offshore contract culminates and

this attracts unexpected expenses which lie between 3 and 5 percent of the total annual costs

(Burnett, 2012). To begin with, workers must be compensated and paid their retention gratuities.

Moreover, the company has to retain its employees long enough for purposes of sharing their

skills, knowledge, and expertise with those left behind. If so, this will demote the morale of the

retained employees who fear being laid off and may require the company to reassure them of job

security. However, this may take a duration of up to 3 years before both parties come to a

consensus over the agreed terms and conditions of work.

Productivity costs inhibit offshore savings where replacing a home employee with a

foreign worker may turn out to be a very challenging task. Home country employees are better

placed in terms of the comfort level and the ability to adapt and easily integrate into the system.

However, hiring a foreign worker incurs the company extra costs in the quest to attain full thrust

and adaptation, but productivity may be derailed during the transition. Additional costs may also

be incurred in managing and updating of records, invoicing and auditing. Most company

executives neglect the thoroughness, the time required and expenses amounting to 6-10 % of the

total cost during invoicing and auditing (Beulen, Ribbers, & Roos, 2006).

In conclusion, this essay concurs with the undisputable fact that outsourcing is a great

business strategy, but its costs surpass the recognizable IT budgets. While the benefits of

outsourcing may be enticing to managers, they may neglect additional cost incurred while

selecting the most suitable IT vendor alongside transition, lay off and productivity expenses. If

all the real expenses of outsourcing are added up, the figure ranges between 13 and 65 percent

higher than anyone’s expectation (Gold, 2012). It is, therefore, pivotal to estimate the total costs

and the possibility of system development before outsourcing the services of an IT vendor.

THE TRUE COST OF OUTSOURCING IT DEPARTMENTS 4

References

Beulen, E., Ribbers, P. & Roos, J. (2006). Managing IT Outsourcing: governance in global

partnerships. London New York: Routledge.

Burnett, R. M. (2012). Outsourcing IT - The Legal Aspects. Abingdon: Gower. Retrieved from

http://www.ebrary.com

Gold, T. (2012). Ethics in IT Outsourcing. Boca Raton: CRC Press.

Solli-Saether, H., & Gottschalk, P. (2010). Managing IT Outsourcing Performance. Hershey, PA:

IGI Global.

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