5 Hidden Costs of Outsourcing IT Services

5 Hidden Costs of Outsourcing IT Services

Many organizational decision-makers choose to outsource because they see it as an easy way to cut costs. What they fail to realize, however, is that it’s rarely ever that straightforward. And since there’s little motivation for service providers to be transparent about these financial risks, business leaders must be diligent about identifying and accounting for these additional expenses. In many instances, it’s actually far less costly to keep IT services in-house. If you are considering an outsourcing arrangement, keep the following hidden costs in mind.

Change Orders

When it comes to outsourced IT services, just about every minor change comes at a price. Those managing outsourcing agreements must stay aware of what these change orders entail and how much they’re going to cost in the end. This can all be avoided, of course, by bringing IT on premise, where fixed IT staff can make changes to how work is performed and take on special projects at no additional costs.

Consulting

Another factor that can send costs spiraling out of control unexpectedly is consulting. These days, nearly all IT and digital engagements are led by consultants, which can skyrocket expenses far beyond what was originally anticipated. While some areas of IT service have moved to outcome-based pricing models, the consulting piece is still typically assessed on the basis of time and materials, which can vary. And while some organizations appreciate the added value, others may find the additional expenses difficult to justify.

Loss of Control

Over time, things change. Business leaders rotate, companies evolve. As a result, criteria originally agreed upon in the outsourcing contract can become obsolete. It’s imperative that someone holds the service provider accountable to deliver what was agreed on and paid for. It’s also important to audit and eliminate services that may no longer be needed. According to ISG, the average outsourcing contract loses anywhere from 5 to 15 percent of its value because the client is paying for more than what is actually being delivered.

Lack of Agility

One of the costliest things about outsourcing, and sadly one of the most often overlooked as well, is how these contracts can stifle a company’s ability to innovate and therefore compete. Far too frequently, a client will find themselves locked into an agreement at a time when dynamic change is occurring all around them. As such, they become locked out of next-generation technology opportunities, like robotics, AI and deep learning. Likewise, many traditional sourcing models don’t support things like data analytics and mobility. Adapting an existing outsourcing relationships to account for these changes can be incredibly costly, both in terms of time as well as money.

Employee Disengagement

When the costs associated with outsourcing are discussed, one thing many fail to consider is the impact such an arrangement can have on staff retention – particularly during the initial transition period. When IT employees have to make the shift from performing the work to simply managing it, there can be a sense of frustration. This is especially true for highly technical resources. The change in focus can lead to a feeling of being out of touch, and the inability to roll up their sleeves and get their hands dirty can cause a spike in attrition levels. Along with that inevitably comes the cost of hiring and training.

In conclusion…

At first glance, outsourcing IT services can seem like a great way to cut costs and stay competitive, but if you’re not careful, it could end up having the opposite effect. Decision-makers considering outsourcing should carefully weigh the financial risk – including the hidden costs, such as those listed above – to determine whether such an arrangement is truly a viable option.

On-premise IT services, on the other hand, can be surprisingly cost-effective, particularly once all the true costs of outsourcing are revealed. For instance, with on-site IT, changes can be made without additional expenses incurred and there is no need for costly consultants. And with internal control comes the ability to scale and adapt to changing technological landscape. Employees are happier and the company is able to compete at a higher level.

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