Return of the Guru

Outsourcing Gains Popularity, But Where is it Best Applied?

Ara Trembly
Insurance Experts' Forum, October 12, 2010

A new study from by Computer Economics Inc. (CEI) shows companies shifting more of their IT spending to outsourcing services, “in some cases dramatically, as they grapple with staff reductions and budget cuts amid the economic downturn.”

The study, "IT Outsourcing Statistics 2010/2011," shows that outsourcing expenses as a percentage of total IT spending rose at the median from 3.8% in 2008 to 6.1% in 2009. From 2009 to 2010, median spending on outsourcing as a percentage of total IT spending rose again to 7.1%.

According to CEI, during this period many organizations put capital projects on hold, cut operating expenses, and laid off workers.  The rise in outsourcing expense as a percentage of total IT spending is partly a result of a decline in overall IT spending, according to John Longwell, VP of research for CEI. 

“In any case, the bottom line is that IT organizations are outsourcing a greater portion of their IT functions today than just a few years ago,” Longwell says. "The recession seems to be accelerating an ongoing trend, but there are other factors. We're seeing a sharp rise in the number of organizations outsourcing applications to SaaS vendors, for instance. Cloud computing is a development that will result in more money being spent with outside service providers, regardless of the macroeconomic climate.”

CEI makes clear that its study is not defining “outsourcing” as “offshoring,” adding that most of the outsourcing it sees is with onshore providers.  Still, those projects are being held up, operating expenses are being cut and workers are being laid off.  It will be precious little comfort to those who have been thrown out of a company to know that most likely it is someone here in the U.S.A. who is replacing them. 

It seems clear from the CEI research, however, that organizations have embraced a bunker mentality for IT that has them delaying growth initiatives while they hunker down and wait for economic conditions to markedly improve—a process that could take five to 10 years, according to some economists.  The real question is: Now that we have less to spend, where can we best spend it? 

Interestingly, the insurance industry—renowned for its head-in-the-sand approach to technology—is at least spending IT dollars to improve core functionality like policy administration systems that will help keep customers happy now and draw new customers in when things really do get better.  While some may see that as a rather daring strategy, it really is a fiscally sound course for an industry whose very life depends on the rapid, efficient and accurate handling of data. 

If, however, insurers want to otherwise keep their financial cards close to the vest, they would be wise to invest their outsourcing funds in improving the quality of their data.  Nothing will gum up the works of claims or any other process more than having redundant, inconsistent and “dirty” data from many sources.  No matter how well your hot, new technology applications promise to work, they will be brought down by bad data like flies on sticky paper. 

So if you’re wondering what to do with your IT outsourcing budget while the recession rages on (and it still is raging on), try cleaning up your data and data processes.  Insurers who do so will find themselves at a competitive advantage when the economy recovers in earnest. 

Outsourcing service providers, like many IT vendors, suffered during the recent recession as businesses reduced IT capital and operational spending. Organizations that were using outsourcing to fill in around the edges cut outsourcing services out of their budgets in favor of retaining in-house staff. Other IT organizations, however, increased the amount of work they were giving to service providers as they downsized their internal staffing levels.

Other key survey findings:

•    The use of Software-as-a-Service and hosted applications is widespread. Applications hosting is the most frequently outsourced IT function in the study. However, the percentage of the typical portfolio being outsourced is still small, and the outsourcing cost and service success rates are low compared to other IT functions in this study.

•    While SaaS/hosted applications are the most frequent form of outsourcing, it is not the most popular when measured by both frequency and level: The outsourcing of Web and e-commerce systems holds that honor.

•    Outsourcing services having the most success penetrating deeper into existing accounts include SaaS/application hosting, data center operations and application maintenance. The outsourcing trend lines are positive for these IT functions.

•    The IT function with the greatest potential for reducing costs through outsourcing is desktop support. Nearly 44% of organizations that outsource this function find that they have lower costs than when they performed the function in-house.

•    The outsourcing service that holds the greatest potential for improving service levels is IT security. Half of organizations that outsource IT security report that it improves service levels.

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