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Capability More Important Than Price When Outsourcing

Price is no longer CIO's top reason for outsourcing. Many companies are now looking at capability and speed to market as the primary benefits of outsourcing. Searchcio.com recently asked nearly 500 CIOs for their main criteria for outsourcing. The responses showed that 44% rated capability as criteria number 1, followed by price (25%) and resource availability (16%).

We spoke to a few mid-size customers from the UK and US this week to discuss their opinions. Two of them confirmed that capability is important, but in these recessionary times it is difficult to get a CFO approval to buy an IT service if it is more expensive than in-house operation, unless it was related to a compliance or business transformation requirement. One case in point is a mid-sized media company that delivers nearly all of its content via the web. The company is looking to transform its business through operational changes and significant system improvements. The IT department consists of a handful of full-time employees who are normally stretched to capacity whilst running the day to day operations. Therefore, the CTO decided to source an offshore partner to manage and deliver the new transformation projects.

This case demonstrates a couple of points. Small businesses are starting to offshore to reap the same cost benefits as larger companies. Secondly, it provides nearly instant access to a wealth of IT knowledge that they may not have in house. Third, a sound contract provides the flexibility quickly ramp up or ramp down project teams, providing added control around costs.

Price still plays an important role in the decision making when it comes to selecting an offshore partner. A few months back we ran an auction for a client and there was a strong leader in terms of the quality of their proposal, professional account managers and a strong client reference book. After seeing prices drop by up to 40%, the favourite was still well behind the front runner. While the CTO clearly wanted the favourite to be selected, the business board could not justify the price difference, and made the decision to go with the price-leader.

This simply shows that while capability and flexibility are increasing in importance, price continues to be a strong factor in outsourcing decisions.  

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