Pick Your Perspective on IT Outsourcing

Computerworld - Outsourcing has ancient origins. It has been the basis for all trade since the birth of organized society over 10,000 years ago. Civilization can progress only by making the best use of resources, wherever they may be available. That makes it necessary to purchase goods and services you'd otherwise have to produce yourself.

Why has outsourcing suddenly become one of the most controversial topics among IT professionals? As far as IT staffs are concerned, outsourcing breaks up the traditional budget patterns wherein a company had direct control over 80% of IT spending. IT outsourcing is seen as a threat to the status quo and to the custodianship of custom-made systems. IT staffs now have to compete with outsiders. Systems designs that locked in costly corporate-specific solutions now have to become open to standard and even commodity solutions. If your job is at stake, you won't favor something that alters a hitherto protected situation.

Nevertheless, IT outsourcing is here to stay and will continue to grow with the rise in global commerce. Therefore, it may be useful to gain a better perspective of what outsourcing could do for your organization. In doing so, you'll be better able to rationally cope with outsourcing proposals whenever an economic justification for such a move is presented at your company. To illustrate, I use the economics of a $40 (retail price) Logitech computer mouse.

Logitech Inc. is a Fremont, Calif.-based multinational company. The mouse is assembled in China. According to The Wall Street Journal, the assembly costs $3, about $1 of which is spent on information overhead. Globally produced parts costing $14 account for most of the mouse's manufactured costs. I estimate that the logistics support to get the components to the assembly plant consumes about $3.50. This leaves the company with $8 for sales, marketing, and research and development, plus profit, with an estimated $6 of that going toward information management. The mouse is then sent through a distribution and retailing chain costing $15, an estimated $10 of which is for information costs. From Logitech's standpoint, it has outsourced 80%, all but corporate costs and profit, of the value chain (see "Economics of IT Outsourcing" below).

If the CIO of Logitech had oversight of every penny of corporate IT spending, this would account for only 66 cents. In a typical outsourcing contract that produces 10% in operating savings, the deal could shave as much as 6.6 cents from total costs. From a purely technical standpoint, such a move could be worthwhile. However, this still begs the question of what the role of a CIO ought to be in a multinational organization. Does the scope of the job just cover the 66 cents for corporate IT; does it include $6 for corporate information management and $10.50 for the logistics pipeline stretching from China to Logitech's warehouses; or is the CIO responsible for the $20.50 in total information costs that matter when competing against aggressive suppliers?