Experts warn that firms that spend too much time focussing on lowering costs, pay the price

The desire to reduce costs is still the main reason for firms to outsource their IT functions, according to a new survey by analyst firm Gartner. However, experts warned that some firms are paying too much attention to reducing costs, and are ignoring other important aspects of suppliers' performance as a result, which increases the risk of project failures.

Gartner surveyed 945 IT managers globally, including 300 in Western Europe. It found "reducing costs or improving efficiencies" was the most popular reason for outsourcing IT functions – over half the respondents said it was the main reward they expected from outsourcing.

Gianluca Tramacere, principal research analyst at Gartner, said the emphasis was not surprising, but warned that an excessive focus on reducing costs is one reason for the high proportion of outsourcing projects that fail to meet customers' expectations.

"The problem with focusing on cost savings is that once they are delivered the customer inevitably asks, 'What next?' and starts looking for further value from the deal," said Tramacere. "Firms may then find that the provider they chose to deliver cost savings doesn't have the skills to deliver further innovations. It means they may have to change the contract or even change the supplier."

Firms attempting to lower costs through outsourcing also need to appreciate that the strategy does not suit every IT department, according to James Doyle of IT outsourcing specialist Xansa. "As an IT director you've got to be clear on what the function of IT is to your organisation," he advised. "If it is just a tool then you are right to screw your supplier down on cost as much as possible, but if it is a strategic part of your business you need to think about what innovation your supplier can deliver."

The research indicated that more firms are now expecting such innovation from their IT providers. Forty-eight percent of European IT managers said they expected outsourcing to deliver enhanced agility, while 43 percent said it could improve service to end-users.

The findings were endorsed by Som Sarma of Indian IT service provider Satyam. He said there is still an emphasis on costs but a growing number of customers are also considering factors such as service quality and reliability when making outsourcing decisions.