At first glance, it seems like a great idea: you are strapped for time and so you get someone else to do your work for you and possibly at a fraction of the cost. No wonder many recession-hit companies are thinking about outsourcing, especially when it comes to complex IT services. Analysts predict that the global outsourcing market is set to grow by more than 8 per cent this year as businesses look to save money on IT expenditure.

Yet two reports just published suggest that this could be a costly mistake. Companies are likely to emerge from the recession lacking in innovation and locked into cheap-and-not-so-cheerful contracts that are expensive to renegotiate or cancel.

Leslie Willcocks, director of the outsourcing unit at the London School of Economics and Political Science — which produced the report Outsourcing in difficult times: Releasing cost but maintaining control with Logica, the IT and business services company — says that when the recession hit, companies initially deferred making decisions, so some contractors waivered fees in a bid to get contracts signed.

“Meanwhile, some [companies] did some quite dirty short-term cost-cutting deals with suppliers. They went to suppliers and said: 'Look, you've got this contract, but we need 20 per cent off it. So how are you going to do it?' They pushed the problem on to the supplier and I suspect this could be quite dirty further down the line when they seek to unravel those contracts, because you can't cut costs by 20 per cent if you're offering a service unless you are not doing certain things.”

Other cost-cutting practices include companies “bundling contracts together into one supplier so that they can ask for a much greater cost reduction or by going to more contractors, slicing it even smaller, and then going for the lowest bid on each contract.”

The drive to cut costs is paramount in the second report: Outsourcing — what lies beneath, is by PA Consulting, another business services company. Its survey of more than 100 customers, service providers and lawyers found that nearly 31 per cent of companies plan to outsource more IT and 28 per cent to renegotiate IT outsourcing contracts “in a bid to attain more value” in the recession. A total of 73 per cent were in the process of breaking up single outsourcing contracts and moving to multiple providers.

Jonathan Cooper-Bagnall, head of sourcing consulting at PA, said: “If you are an organisation that wants to save money and are looking at how you might cut costs, then it might look attractive on the surface to break up large contracts or, indeed, to move work you have done in-house into this multisourced environment. The worrying thing is that there was very little suggestion in the survey that people understood what it was going to take to manage all of those suppliers.“Outsourcing might end up costing you more money than you had ever thought possible. Far from saving you costs, you might take some short-term reductions but within the next 12 to 18 months you are going to be on the back foot and spending more money on this than you had envisaged.”

He said that companies needed to invest in staff to manage the relationships with suppliers. They also needed to make sure that multiple contracts did not stifle innovation or the ability for the company to adapt and change direction in the long-term.

David Bickerton, chief information officer for British Gas, which has multiple contractors for its IT infrastructure, said: “The investment is around having the right people and capabilities internally to develop the relationships and provide the kind of integration you need.” He added that British Gas's decision to outsource to multiple players was a tactical, not a commercial one. The company had spent a lot of time making sure that its suppliers understood its business strategy and their role in it. Collaboration was the key, he said.

Professor Willcocks said that there were alternatives to outsourcing IT to survive the recession. These include simply slowing down delivery of the IT strategy, outsourcing other functions, such as HR, accountancy or procurement instead of IT — “you'll find that they all have at least 20 per cent inefficiencies and you can always improve them” — of even moving those functions offshore.

If you must outsource IT, restrict it to fewer than five suppliers, Professor Willcocks advised, otherwise it starts to become unmanageable and costs begin to soar. There are 26 reasons to outsource, he says, so think beyond mere cost. “It is no good just doing what you have been doing, just at a lower cost.”

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