IT outsourcing: between starvation diet and nouvelle cuisine

This study from DB Research looks at the IT outsourcing market with a focus on Germany. The paper also considers “offshoring” ot IT resources to low-wage countries such as India and China. The markets are promising: Some 300 billion US dollars worth of processes are expected to be outsourced in the next five years worldwide, up from 54 billion in 2003. But the researchers warn outsourcing projects, especially bigger ones, require careful preparation and should not be launched for cost motives alone.

IT outsourcing: between starvation diet and nouvelle cuisine

IT outsourcing is on every body’s lips at the moment. It involves contracting out to external providers services and IT infrastructures that are not considered core business. Financial services providers in particular are seeking to shed unnecessary weight this way, slimming down and gearing up for tougher competition. The volumes up for negotiation are ample: in 2003 alone outsourcing contracts worth an estimated USD 18 bn were concluded between the financial services industry and market suppliers around the world.

Across all sectors of industry, the German IT outsourcing market has already assumed sizeable proportions, and it continues to grow dynamically. IT services worth in excess of EUR 10 bn were contracted out in 2003. By 2008 we expect this volume to have risen to almost EUR 17 bn.

But outsourcing IT services is not confined to the organisational institutional level alone. Offshore outsourcing, or “offshoring”, is the practice by which companies procure IT resources and processes from cost-efficient low-wage countries, mainly India at present and increasingly so from China in the future. In the coming five years we expect processes worth USD 300 bn (an estimated USD 54 bn in 2003) to be outsourced the world over.

In Germany, offshoring poses a direct threat to almost 50,000 IT jobs by 2008. That is a good 3.5% of the 1.4 million IT jobs we currently have here. As a rule, though, processes and positions with high value creation and strategic importance are kept in the country.

The main business case for selectively outsourcing limited, clearly defined tasks is one of costs. But big-ticket outsourcing projects should not be launched for cost motives alone. They must be embedded in a company’s strategic endeavours to focus on its core competencies.

Outsourcing projects require careful preparation. This calls for technical and organisational competence within the outsourcing company that cannot be contracted out even after outsourcing proper has taken place. Besides the choice of service provider and the definition of Service Level Agreements etc. this entails in particular standardisation of the company’s own processes ahead of outsourcing and clear definition of the interfaces to the service provider’s processes. Any attempt to offload unresolved problems by outsourcing them without due reflection is condemned to failure from the outset.

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