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Cost-cutting still top reason for outsourcing

Companies attracted to outsourcing by promises of cost savings are letting themselves in for long-term problems that outweigh any short-term gains, analysts have warned

Cutting costs remains the primary reason for most organisations going down the outsourcing route, despite unsustainable or unrealistic targets for savings.

But companies lured into outsourcing by promises of cost savings are letting themselves in for long-term problems that outweigh any short-term gains, according to analyst Gartner.compa

Linda Cohen, vice president and distinguished analyst at Gartner, said placing too much emphasis on cost reduction can lead to dissatisfaction because the savings are either unsustainable or never achieved.

This is because the economy of scale and cash injection benefits from outsourcing often disappear after the first year of the contract.

Cohen said in a statement: "You can only expect to receive that cash infusion once; by the second or third year, those 'economies' are forgotten about, the people originally involved have moved on and all too often the value of the relationship begins to wane."

The falling cost of technology and services also means some long-term infrastructure outsourcing contracts signed three or four years ago, are costing organisations more money now. Gartner advises ensuring older contracts are renegotiated to current market rates.

Gartner said the more realistic goals for outsourcing are: to control cost over time and enhance the IT department's ability to budget, to provide access to specialised skills and resources, to enable the internal IT organisation to focus on core mission-critical and business-differentiating services, to improve service delivery, and to give access to scalability.

Cohen said: "There is no doubt that cost is a significant factor in any outsourcing arrangement. However, organisations need to take a longer-term view of what an outsourcing relationship can accomplish for their operations overall."