Outsourcing, offshoring: Not all it’s cracked up to be

Despite the growth of outsourcing, the associated risks are putting off many finance professionals and local government organisations.

CFOs see the offshoring of finance and accounting functions to low-cost locations as a riskier strategy than using cloud computing, according to research by analyst house Ovum.

Of the CFOs and senior financial executives quizzed by Ovum, 38.5 per cent said they view offshoring to India as unacceptable risk, while 44.2 per cent said the same about South and Central America. Just 29 per cent said the same about cloud computing.

Another major factor in businesses not wanting to pursue the “high-risk strategy” of offshoring is loyalty to staff, with 44 per cent saying this issue is holding them back.

Ovum lead analyst Peter Ryan said loyalty to staff is unlikely to be the only motivation because the desire to keep people with relevant skills will also be a factor.

Other major concerns about offshoring cited by the businesses surveyed are a loss of control over processes and the practice not delivering sufficient savings to be worthwhile. Many companies not already outsourcing said they wouldn’t be persuaded to do so even by cost reductions of up to 20 per cent.

Ovum’s Ryan said one of the major challenges for outsourcing companies is to show they “can deliver efficiencies beyond arbitrage through use of low-cost labour locations”.

Meanwhile, local government IT body Socitm has warned that outsourcing IT – especially a whole service – remains risky for local government organisations due to financial risks and a reduced ability to respond to change.

Discussing the pitfalls of outsourcing in more detail, Socitm’s research arm, Socitm Insight, said figures over the past decade suggest processes actually become more expensive if they are outsourced.

Socitm also warns against outsourcing information assets along with technology because this practice can make organisations less able to exploit data effectively to generate further efficiency savings.

In addition, if organisations outsource business IT because they are unable to manage it themselves, it suggests they’ll be equally unable to manage a contract. According to Socitm Insight, they may also be handing over economies of scale and savings that they ought to be able to make themselves.

Another area of risk is that local government organisations could lose valuable inhouse expertise by outsourcing processes, making them less able to challenge supplier recommendations.

In terms of ability to cope with change, outsourcing arrangements are often long-term and fail to address future requirements.

Author of the Socitm Insight report Martin Greenwood said outsourcing “should not be considered an inevitable response to austerity”.

He added that even smaller authorities – that could potentially benefit from outsourcing through economies of scale and extra capacity to react to rapid developments in IT – should first look at collaborating with other local authorities and services rather than automatically going down the outsourcing route.

Source: silicon

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