FEBRUARY 09, 2004 ( COMPUTERWORLD ) - A headline may say that a company signed a $320 million IT outsourcing contract, but the actual costs will likely be much higher. Behind the scenes, the client spends big bucks on evaluating vendors, managing the contract, enhancing security, traveling to offshore sites and potentially paying severance packages for laid-off employees.
"A lot of times, offshore service providers have very good sales and marketing abilities, but companies need to [scrutinize potential contractors] to see what their real capabilities are."
Corporations that outsourced heavily were economic losers heading into the outsourcing act. I couldn't find any corporation with a consistently large EVA and rising employment that was outsourced despite all of the claims about ``synergy'' or ``advantages of getting rid of commodity work.'' The losers were casting off IT because they were already shrinking their firm
One could say that outsourcing has many of the attributes of anorexia nervosa. Anorexics have a distorted self-image that makes them feel fat even when they're emaciated. Refusal to eat and low self-esteem along with emphatic denial of the problem characterize most anorexics. Similarly, executives in companies with poor financial performance seem to concentrate on downsizing as the preferred method for restoring competitiveness.
The losers' average outsourcing-to-sales ratio was 25% greater than the winners'. Eighty-six percent of the losers were outsourcing more than half of their costs. The returns on shareholder equity for the winners were clustered around low outsourcing ratios; the large losers showed high outsourcing ratios.
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 | Outsourcing Transfer Costs
Transition costs can add up to 5% to 15% of the annual base cost of the contract. Here’s an example of an outsourced data center (mainframe, Unix and NT), for which the total deal size is $25 million over five years, equaling $5 million per year.
| Item | Estimated Cost | | Process (knowledge transfer) | $50,000 | | People (employee severance plans) | $100,000 | Technology
 Software license transfers | $100,000 | | Moving acquired hardware | $150,000 | | Parallel processing for critical apps | $50,000 | | New network connections | $50,000 | | Subtotal | $500,000 | | Other contingencies (10%) | $50,000 | | Total | $550,000 | | Annual Percentage of Deal | 11% |
Source: Gartner Inc., Stamford, Conn., 2003 |
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