Weighing the Costs of Outsourcing

Article excerpt

Many companies unhappy with the steep costs of data processing technology are outsourcing their information systems (IS). However, thorough cost-benefit analysis may show that outsourcing is not financially sound for every company. For example, Avon Products, Inc., decided not to outsource after it found it would save less than 5% of its current costs.

When evaluating outsourcing alternatives, prepare a cost-benefit analysis that includes a review of

* The potential gains anticipated for each function being considered for outsourcing.

* The costs and possible risks of each outsourcing alternative.

* The appropriate contract period, including the first and any subsequent periods.

* Intangibles and hidden costs, such as those involved in administering the outsourcing contract and coordination efforts between internal users and the outsourcing company for upgrades, training and configuration changes.

* Contracting and legal costs, including the monetary and opportunity costs involved in contracting, renegotiating or vendor dispute settlements.

* The vendor's fee for each year of the contract periods. Consider the possibility of initial vendor low-balling when making projections for periods after the initial contract. Also, consider adjusting the outsourcing fee according to the cost-of-living index.

* Conversion costs. It is important to investigate in detail the costs associated with the transfer of software licenses, which often run into the thousands of dollars and may exceed any projected cost savings from outsourcing. …