Outsourcing warning as time runs out for struggling IT departments

Takeaway: As the tough times continue, will CEOs decide to wash their hands of their entire IT department?

Even IT departments that have largely escaped cuts so far are at risk of being outsourced in the near future - if CIOs fail to deliver on tough targets set by the business.

The warning from analyst house Gartner is that, in these cost conscious times, CEOs and CFOs are increasingly likely to offload the whole IT department, rather than individual roles, as they look to make short-term savings.

If CIOs are to persuade execs that IT is more than just an overhead they will have to meet demands to reduce running costs and add value to the business, the research report CIO' s Should Beware of a Return to Full Outsourcing warned.

But adding business value while also reducing running costs will be particularly difficult for the IT department, said the research author Claudio Da Rold, and the risk of failure is significant.

This increased risk of failure by CIOs and the board's eagerness to cut short-term costs puts the IT department at the greatest danger of being outsourced wholesale that it has faced in recent years, according to Da Rold.

"CIOs, business unit leaders and IT shared service managers — especially those working for distressed businesses — should nevertheless beware of the attraction to CEOs and CFOs of full outsourcing arrangements that deliver cash upfront or greatly reduced running costs in exchange for long-term fixed-price contracts," the research said.

"The potential threat is…the whole of IT or a shared service gets moved to a service provider," said Da Rold, adding that CIO roles themselves may also be farmed out.

"In this case it's not unusual for some of the top jobs in the unit get moved to the provider."

If Da Rold's prediction comes true it will mark a reversal in a recent trend for businesses to source services from multiple suppliers using short term deals, and a return to multi-year deals with single suppliers that have become less common in recent years.

The return of these Big Bang outsourcing deals is made more likely by supplier pressure, Da Rold said, as vendors try to find ways of preserving revenues while adapting to cheaper service delivery models like cloud computing.

Suppliers will jump at the chance to secure five to ten year deals, he said, which are priced at today's costs and allow them to increase their margins as cloud drives down the cost of service delivery over time.

CIOs who want to see off the threat of losing their in-house department need to mix and match the best value services from suppliers to ensure they can compete with what a third party provider would charge for a wholly-managed IT function, he said, while also remaining focused on adding business value.

"If a CIO implements this kind of strategy they will reduce greatly the risk of being outsourced. A CIO just running their IT as they traditionally did will see this risk rise quite considerably over the next three years."