CIOs Resist Cost-Saving Web Outsourcing

By Rawlson O'Neil King, theWHIR.com

June 7, 2002 -- (WEB HOST INDUSTRY REVIEW) -- Companies that do a lot of technology outsourcing thrive during economic downturns. Traditionally, outsourcing outperforms other segments of the technology industries when the economy experiences hard times. As large corporations attempt to reduce costs, assets, and to leverage against financial risk in lean times, they tend to outsource critical infrastructure.

Cost cutting is the raison d'être for outsourcing. It is therefore not surprising that Gartner, a leading IT research firm, predicted that the North American market for outsourced IT services had reached $47.5 billion in 2001, a 13.6 per cent increase over 2000.

As Internet technology continues to make it possible to shift in-house responsibilities over information technology resources to third parties, corporations have taken full advantage as to accrue financial benefits.

As an example, Gartner predicts that the number of financial institutions intent on utilizing outsourced information technology infrastructure will grow approximately 50 per cent, nearly doubling their demand for data center and storage outsourcing between 2002 and 2003. The result is that many major players in the outsourced IT business can expect their revenue to continue to rise. EDS signed $6.8 billion in new outsourcing contracts in the third quarter of 2001. IBM also signed $10 billion worth of contracts in that same quarter. These large contracts can be attributed to the fact that large corporations and organizations see great advantages in using outsourced services.

The use of technology outsourcers allows corporations to focus on their core business while concurrently fixing costs. The result is that corporations build IT processes from outside that integrate and complement their core operations. Many of these corporations obtain huge returns from IT outsourcing, especially if they implement hosted business software through the application service provision model.

Research from IDC, which studied 50 ASP implementations, found that on average, outsourced hosted application yielded a 404 per cent return on investment (ROI) over five years. Indeed, the average payback for an ASP implementation was 1.33 years on an average investment of $4.2 million. Twelve per cent of the companies that IDC studied reported return on investment greater than 1,000 per cent.

With IT outsourcing demonstrating itself to be quite advantageous, it is not surprising that some chief information officers (CIOs) have shown resistance towards it. According to a recent CIO survey conducted by trade publication CIO Insight, IT managers would rather build up internal staff to handle IT functions if they do not have to utilize the services of an IT outsourcer. Respondents stated that they believed that in 2002 that their corporations would cut back on IT functions most frequently outsourced, including e-business development and Web site hosting.

The report stated that CIOs anticipated that demand for Web site development services would drop from 42 per cent to 30 per cent over the year, while demand for Web hosting would decline from 44 per cent to 33 per cent.

CIOs that responded to the study stated that outsourced hosting was employed by a larger margin of smaller companies than large corporation. If this factoid is indeed correct, then many large organizations are missing out on a great opportunity to obtain cost-savings.

Cost reductions from outsourcing are readily apparent over a three-year period for companies with mid- to high-traffic Web sites. Jupiter Media Metrix, a respected technology analysis and measurement firm, has reported that one-third of U.S. companies overestimate the competitive advantages of hosting Web sites internally and overlook the six to twelve million dollars in cost savings that can be gained over a three year period by outsourcing hosting responsibilities.

While CIOs voice reluctance to outsourcing due to the human and capital resources that they lose, the reality is that the outsourcing of Web hosting, application hosting, and e-business development is more rational and advantageous in many instances, leading to tremendous cost-savings in areas of corporate non-competency.