By Ed Agar

Businesses are increasingly outsourcing functions from throughout their organizations that were formerly done in-house.

The familiar benefits of out-sourcing accounting functions - cutting costs and freeing up resources to focus on core competencies - can be realized even more significantly when this approach is applied to information technology operations.

IT planning and budgeting are often surrounded by confusion and uncertainty. An understanding of IT outsourcing options and where they are best utilized will enable accounting professionals to provide sound, savvy guidance to their clients.

Currently, sourcing is the predominant IT delivery model, in which firms own the hardware, software, middle-ware and custom applications that are managed by internal IT departments, systems integrators and contracted employees.

However, budget restrictions and cutbacks are preventing the necessary investment in technology and staffing to operate IT departments as effectively as they should.

Understanding that a well-executed outsourcing strategy can offer the opportunity to provide a higher return on investment and quality of IT service delivery than in-house capabilities, we will consider the following outsourcing models:

Virtual computing. The company disposes of its IT assets and pays application service providers on a metered basis for applications on the Web; this is also known as on-demand computing.

Outsourcing. A kind of catch-all phrase for sourcing, but, strictly speaking, in outsourcing the company’s IT assets are sold to a third party who then manages the IT department with the goals of achieving economies of scale and meeting expense targets.

Selective sourcing. The use of third parties to manage individual IT components or entire applications.

Each delivery model has its valid applications. For instance, industry forecasts for growth areas in outsourcing include Forrester Research’s projection of a five-year, 54 percent annual growth rate of application sourcing (which includes selective sourcing), and a 32 percent annual growth rate of network outsourcing.

Determining the appropriate sourcing model requires the same preparation and business analysis for all three options. First, IT goals must be aligned with a business’ objectives.

In the past, IT acquisition was most often used as a market differentiator. Businesses need to realign their thinking to the utilization of IT as a tool to achieve business goals, not as an end in itself.

Second, examine the requirements of the individual organization and its cost structure in comparison to its competitors.

Outsourcing is probably the most familiar of the IT sourcing models. The time to outsource an IT operation can range from 10 to 20 months. Two drawbacks of this option are receiving fair market value for the disposal of the IT assets and the delay in realizing cost savings.

The main advantages are the predictable IT expense and cost containment in future years. A client should expect to incur between 3,000 and 10,000 hours to bring a full outsourcing contract to completion.

Selective sourcing is a lesser-known IT sourcing option when it comes to application management and maintenance. Some areas of IT that are best known for selective sourcing are Web hosting, network management, and business continuity (disaster recovery), but its apparent advantages over traditional outsourcing should bring it more attention in the coming months.

The advantages of selective sourcing include:

● Shorter negotiation and contract cycles, since sourcing can be accomplished within three to six months;

● Shorter time to savings realization, due to faster implementation times;

● Less disruption to operations, since the existing CIO team can orchestrate the vendors with internal staff;

● Flexibility, since the organization can commit to sourcing only on elements where significant savings will be realized;

● Room for growth, since parceling of services can serve as a testing ground for compatibility between client and provider; and,

● Access to innovation, since the selective sourcing provider has the ability to allocate innovative software across its entire customer base.

Time incurred by the client for a selective sourcing project can range from about 100 real-time hours for a simple contract, to approximately 900 hours for a more complex one.

Virtual computing has received the most media attention recently. Industry leaders such as IBM, Hewlett-Packard, Computer Associates, Sun and Microsoft are generating tremendous publicity trying to create demand for virtual computing. At this time, utility computing is two to three years away from being a viable sourcing option for all but early adopters.

However, the prospects for the promised cost savings and efficiencies are technologically valid, and it would be prudent to begin an IT blueprint that would phase in virtual computing in the future.

Sourcing models can be applied to virtually every niche of IT management. A recent report by the Aberdeen Group classified IT service provider areas for sourcing into the following seven categories:

● Network management services of local-area and wide-area network devices.

● Security management services for firewalls, virtual private networks and intrusion detection devices.

● Desktop management services for desktop computers, laptops, printers, and print and file servers.

● Infrastructure management services for operating system, database, Web and application servers in corporate and Internet data centers.

● Application hosting services, which are enterprise-owned e-business applications from third-party Internet data centers.

● Application management services for Internet and enterprise applications (including legacy), from problem identification through resolution.

● Application performance management to manage availability, performance and service levels.

Interestingly, application hosting and application management services account for more than 70 percent of IT budgets, and should, therefore, receive considerable focus in the IT cost-containment goal.

As organizations evolve from insourcing to selective sourcing, to outsourcing, to virtual computing, they should expect to save from 15 percent to 25 percent in IT costs at each step - in essence, cutting IT spending by 40 percent on average.

The decision to contract out is driven by a persistently sluggish economy and the resulting cuts in IT spending and staff. The result has been a dramatic shift in corporate IT investment strategy from the aggressive acquisition of new technology for competitive advantage to one of merely trying to keep costs under control.

However, this “hunker-down” mentality is decidedly at odds with the evolving IT needs of businesses, and sourcing models can be implemented to meet these needs while adhering to the bottom line.

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