IT Increases Application Outsourcing Despite Disappointing Strategic Value

Five out of 10 outsourcing buyers will up their bets on applications outsourcing, according to a joint survey from KPMG and HfS Research, but they continue to be disappointed by providers' analytical capabilities and innovation.

By Stephanie Overby
Fri, July 12, 2013

CIO — Half of all companies plan to increase their application development and maintenance (ADM) outsourcing this year, according to new research from tax and business consultancy KPMG and outsourcing analyst firm HfS Research.

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That's not surprising, says Phil Fersht, CEO of HfS Research. "The more experience the buyer gets with outsourcing application development work -- coupled with the increased knowledge their provider develops of its institutional processes -- the greater the cost savings that can be achieved by moving more work out to the providers' lower cost staff." Increased adoption of Software-as-a-Service offerings and the desire to transfer legacy applications to third parties also continues to fuel growth in ADM outsourcing, says David Brown, principal in KPMG's Shared Services and Outsourcing Advisory.

But while the majority of the 399 outsourcing customers surveyed -- 88 percent -- are satisfied with the cost reduction and standard delivery performance of their providers, they indicated that outsourcers are falling short in other areas. Just nine percent reported that their outsourcing providers were very effective at achieving innovation, 11 percent said providers were very effective in accessing analytical capabilities, and 18 percent said they were very effective in gaining access to new technology.

If outsourcing customers are looking for someone to blame, however, they might start by looking in the mirror.

"Clients wanted cheap and cheerful, they got cheap and cheerful," says Fersht. "And there are many providers today specializing in the cheap and cheerful, who are really damned good at it. Some of them even openly discuss with analysts and advisors that their main strategy is to target HP and IBM renewals and undercut them by 30 percent."

While outsourcing buyers say they want more than low costs and standard delivery from their outsourcing relationships, their contracts tell a different story. "Gaining more strategic benefits from outsourcing, such as gaining access to premier talent, has a price and often organizations with a strong focus on maximizing cost savings contract with providers in a way which limits their ability to deliver premier services or premier resources," Brown says. "It is a case of 'you get what you pay for', and over the past several years many clients wanted to pay for as little as possible."

That's unlikely to change in the near term, says Fersht. "When you consider that most major enterprises began outsourcing administrative IT in the 90s -- and some even earlier -- you have to draw the line that if these are the results of two decades of engagements, it probably isn't going to get much better."

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