Outsourcing Information Technology: Cutting Costs Or Cutting Your Throat? I heard recently that it will cost the average U.S. family somewhere in the neighborhood of $700,000 to raise a child from birth to adulthood. Assuming thats true, I wonder what some parents would say if someone were to offer to do the entire job of child-rearing for significantly less–say, $400,000?

Lets say a company approaches a parent and pitches its core of child-rearing experts, certified teachers and counselors, short-order cooks, impromptu chauffeurs, and just about any other specialty needed to rear the average American youngster.

“Thats right, Mrs. Smith,” the slick sales rep would intone, “we here at Take-in Village can give little Billy here just the kind of upbringing you yourself would give him. But theres one big differencewe do it for much less than it would cost you! Of course, we invite you to visit our facilities anytime to ensure that Billy is receiving all that we promise.”

“Youve given birth to this child. Now let us do the hard part by raising him,” the sales rep importunes. “Believe me, we can do a better job of it than you can.”

“Hmmm maybe theres something to that,” thinks Mrs. Smith. “Billy has been more than I can handle ever since he turned two. Who knows how much worse it could get? These people sound like theyre prepared for anything.”

Then the rep closes in for the kill.

“Why, with all that extra cash, just think of the great vacations you could take, the cars you could buy, the exotic beauty treatments you could now affordthe book you could write! The time and money savings are tremendous. And you could always keep in touch with little Billy by e-mail, maybe send him a postcard.”

On the face of it, this proposal might seem attractive, especially to a mom or dad whose kids are misbehaving. But I daresay most parents would blanche at the thought of allowing some outside company to take over the entire job of raising their children. Mercifully, in our society, its unlikely that a business like Take-in Village could thrive.

In the world of information technology, however, the story is a bit different. Increasingly, all kinds of corporations, including insurers and insurance agencies, are shipping all or parts of their critical IT operations out to third parties–often overseas to India, Pakistan, Ireland and other far-flung locales. Its called outsourcing.

Typically, outsourcers will deliver services at (seemingly) very attractive rates, and they may very well have expertise beyond the in-house capabilities of client companies–especially smaller firms with smaller IT shops. Theyll also sell the fact that using their services will free your IT personnel to concentrate on other, more important tasks.

Or, if youre outsourcing your entire IT operation, it could “free” those personnel to look for new jobs. But more on that later.

According to Chuck Johnston, director of industry marketing for Callidus Software Inc. in San Jose, Calif., outsourcing can be cheaper–but not always. Outsourcing functions such as network management and telecommunications management can, indeed, be less expensive than handling such operations in-house.

But the story is different when a company starts to look at outsourcing applications and applications development, deciding not to have an IT department anymore, said Mr. Johnston, formerly an insurance industry analyst with META Group Inc. in Stamford, Conn.

“Based on my experience, [such outsourcing] seems cheaper in the beginning, but most companies have unique business operations, so they have to adjust the outsourced platform to meet their needs,” he explained. The alternative, he noted, is for the company to change its business processes to adjust to the outsourcers more generic processes. Either way, “it can be very expensive for a company,” he added.

Theres also the outsourcers profit motive to be considered, said Mr. Johnston. The outsourcer may add 10-to-15 percent to its prices in order to make a profit. “You cant zero-base the operation like you could if it was your own company,” he observed.

International outsourcing brings its own set of problems, Mr. Johnston continued. While the offshore outsourcers rates are often much lower than those of U.S.-based companies, “theres a reason for that price difference,” he asserted. “Its not easy for that [international] person to come and work for you in Cleveland.”

Companies that outsource internationally must layer in additional costs for communication, coordination and training, said Mr. Johnston. In addition, a remote work force makes project management more difficult and expensive.

Now lets get back to that key point about outsourcing that puts people on the street. If were talking about outsourcing IT to a foreign country, were talking about exporting American jobs, a practice we should hardly condone in a soft economy.

Insurers are quick to point out that income from investments has plummeted over the past few years, but if theyre also sending American IT jobs to foreign soil, they should be pointing fingers squarely at themselves. Granted, most companies are not exporting a high volume of jobs, but try telling that to the programmer who has just been axed or the database manager who has been downsized.

“Youre not only transferring jobs,” added Mr. Johnston, “youre transferring intellectual property [to foreign countries]. It weakens our competitive stance as a nation.” He warned that “intellectual property laws, especially in Asia, are not as robust as in the United States. Companies have limited legal recourse to deal with it.”

Can Take-in Village raise your kids better and for less money than you can? While they may have experts, you have the experience and personal caring that will, hopefully, be a solid foundation for your childrens development. Put simply, you know your kids; they dont.

Can an outsourcer handle your IT functions better and for less money than you can? In some areas, they probably can, but at what point are you letting the idea of saving a few bucks undermine your companys long-range stability? Put simply, you know your company; they dont.

Make no mistake, outsourcing is a viable and laudable option in the many cases where expertise is lacking, or where current IT personnel need to concentrate on other, perhaps more business-critical tasks.

Mr. Johnston frames the key problem: “Are [companies that outsource] in the short term driving down expenses at the expense of the economy and their own revenues?” This is a question each insurance firm must answer for itself. But it is a critical question that must be carefully considered before farming out key IT operations–the guts of any firm's infrastructure.

Ara C. Trembly is NU's senior editor and resident tech guru. He may be reached at atrembly@nuco.com. We could have outsourced this column to a freelancer, but chose to stick with the proven value of Ara's in-house expertise.

Reproduced from National Underwriter Edition, July 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.

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Outsourcing Information Technology: Cutting Costs Or Cutting Your Throat?

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