IT Key Metrics Data 2010: Key Outsourcing Measures...

Benchmark Analytics

Publication Date: 14 December 2009 ID Number: G00172676

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IT Key Metrics Data 2010: Key Outsourcing Measures: Outsourcing Profiles: Overview

Jamie K. Guevara, Linda Hall, Eric Stegman

This report contains metrics regarding Information Technology (IT) outsourcing. The focus of the report is both on IT spending and staffing and qualitative analyses around management of the sourcing process.

Publication Date: 14 December 2009/ID Number: G00172676 of 25

© 2009 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

TABLE OF CONTENTS

Analysis ....................................................................................................................................... 3

LIST OF FIGURES

Figure 1. Outsourcing Spend as a Percent of Total Spend ............................................................ 3

Figure 2. Outsourcing Spend as a Percentage of IT Budget by Industry ........................................ 4

Figure 3. Outsourcing Spend as a Percentage of IT Budget by Region ......................................... 5

Figure 4. Maturity of Approach to Outsourcing .............................................................................. 6

Figure 5. Most Advanced Outsourcing Arrangement in Place ........................................................ 7

Figure 6. Length of Contract by Service ........................................................................................ 8

Figure 7. Percent of Services Outsourced by Function .................................................................. 9

Figure 8. Satisfaction with Outsourced Services by Function ...................................................... 10

Figure 9. Plans for Change in Outsourcing Levels Next Year ...................................................... 11

Figure 10. Percentage of total applications planned spending directed to offshore or near-shore resources. .................................................................................................................................. 12

Figure 11. IT Outsourcing Dollars Managed per FTE - Total ....................................................... 13

Figure 12. IT Outsourcing Dollars Managed per FTE – Enterprises With High Levels of Outsourcing (>$15M).................................................................................................................. 14

Figure 13. IT Outsourcing Dollars Managed per FTE – Enterprises With Medium Levels of Outsourcing ($5-$15M)............................................................................................................... 15

Figure 14. IT Outsourcing Dollars Managed per FTE – Enterprises With Low Levels of Outsourcing (<$5M).................................................................................................................... 16

Figure 15. Which best describes the service level agreements in place with external service providers? .................................................................................................................................. 17

Figure 16. Which best describes the SLA penalties/rewards in place with your external service providers? .................................................................................................................................. 18

Figure 17. How Organizations Satisfy Benchmarking Clauses in Their Outsourcing Contracts .... 19

Figure 18. Quality of Experience with Benchmarking Outsourced Contracts ................................ 20

Figure 19. Applications Hourly Contractor Rates ......................................................................... 21

Figure 20. Applications Hourly Contractor Rates – by Region ..................................................... 22



ANALYSIS

Figure 1. Outsourcing Spend as a Percent of Total Spend

Source: Gartner IT Key Metrics Data 2010

Enterprises have a wide variety of sourcing strategies which drives the range of this metric.



Figure 2. Outsourcing Spend as a Percentage of IT Budget by Industry


The percentage of IT outsourcing varies significantly by industry.



Figure 3. Outsourcing Spend as a Percentage of IT Budget by Region


The percentage of IT outsourcing also varies significantly by region.



Figure 4. Maturity of Approach to Outsourcing


The figures are based on self reporting from Gartner clients.



Figure 5. Most Advanced Outsourcing Arrangement in Place


Utility – This is the most basic type of arrangement. This deal focuses primarily on cost control and, over time, cost reduction with the goal of maintaining consistency in the delivery of services. Utility deals are also characterized by the fact that they are generally for large volumes of repetitive actions and are typically commoditized in the marketplace.

Enhancement - This deal is based on business productivity improvement. Although enhancement deals can be — and often are —for large volume repetitive actions, the key differentiator is the business goal, which is to increase the enterprise's more competitive positioning through optimizing service delivery and improving on the enterprise’s performance.

Transformational – This is the most complex type of arrangement. This deal is characterized by a partnership between the enterprise and the service provider that is focused on innovation and new business, changing the very basis by which an enterprise competes. The relationship objectives are primarily the speed to achieve new business models.



Figure 6. Length of Contract by Service


The longer a contract is in place the more likely that some renegotiation may need to take place between the enterprise and the service provider.



Figure 7. Percent of Services Outsourced by Function


This figure represents the amount of outsourcing by IT function. Percentage WAN outsourcing does not include transmission costs.



Figure 8. Satisfaction with Outsourced Services by Function


Satisfaction levels are measured on a scale of 1-5 where 1 = least satisfied and 5 = most satisfied.



Figure 9. Plans for Change in Outsourcing Levels Next Year


According to the data there will be a net increase in outsourcing in all IT functions next year.



Figure 10. Percentage of total applications planned spending directed to offshore or near-shore resources.


An evaluation of offshore or near-shore outsourcing should take into account the costs and coordinating services and the quality delivered.



Figure 11. IT Outsourcing Dollars Managed per FTE - Total


All companies who outsource require internal resources to manage their contracts.

Development and ongoing management of issues such as vendor selection, negotiation, terms and conditions, service levels, points of contact, rules of engagement, problem resolution, escalation, and discount structures are some of the key functions that must be performed by internal IT staff responsible for managing the contract.

The chart above shows on average how much outsourcing contract value one FTE performing these functions for a company supports.



Figure 12. IT Outsourcing Dollars Managed per FTE – Enterprises With High Levels of Outsourcing (>$15M)




Figure 13. IT Outsourcing Dollars Managed per FTE – Enterprises With Medium Levels of Outsourcing ($5-$15M)




Figure 14. IT Outsourcing Dollars Managed per FTE – Enterprises With Low Levels of Outsourcing (<$5M)




Figure 15. Which best describes the service level agreements in place with external service providers?


Service Level agreements (SLAs) help set expectations between a IS and external service providers. They outline the types services to be delivered, the single point of contact for end-user problems and the metrics by which the effectiveness of the process is monitored and approved.



Figure 16. Which best describes the SLA penalties/rewards in place with your external service providers?


Service Level agreements typically have penalties for missing agreed upon targets performance levels. Some agreements also have incentives for exceeding targets.



Figure 17. How Organizations Satisfy Benchmarking Clauses in Their Outsourcing Contracts


Most large outsourcing contracts have benchmarking clauses. A typical benchmarking clause states that at some point during the life of the contract, pricing is to be compared to the external marketplace. This is done to ensure that pricing remains competitive.

Performing these comparisons can be challenging because not two outsourcing contracts are exactly alike.



Figure 18. Quality of Experience with Benchmarking Outsourced Contracts


Processes for benchmarking outsourcing clauses are still maturing. Many respondents have either not executed their outsourcing clauses yet, or feel the process needs improvement.



Figure 19. Applications Hourly Contractor Rates


Hourly rates for applications contractors can vary greatly depending on geography, skills and many other factors. This data for this metric was based on responses to the following:

Provide your average contractor hourly rates for a mid level applications developer with 3-8 years of experience/BS Degree. Contractor can take lead on technical tasks, and can explain (rather than recommend) solutions to customers.



Figure 20. Applications Hourly Contractor Rates – by Region


Processes for benchmarking outsourcing clauses are still maturing. Many respondents have either not executed their outsourcing clauses yet, or feel the process needs improvement.



Notes:

Calculations were made using worldwide observations and include companies from various industries.

These measurements do not reflect unique business requirements.

For additional definitions, please refer to the Gartner IT Key Metrics Data Glossary.

Glossary:

Outsourcing:

Any situation where the full operational responsibility for a particular set of IT services is completely handed over to an external service provider.

Beginner:

These organizations do not have much experience at sourcing and outsourcing. Additionally, their top management doesn't look at sourcing as a powerful management tool or as viable solution to their business problems.

Practical:

These organizations have pragmatic experience with engaging External Service Providers for single projects or service areas, transferring some level of risk and responsibility to providers. What these enterprises and managers usually lack are vision and the ability to make sourcing decisions on a more-strategic, business-oriented level.

Visionary:

These organizations have a strong vision regarding the need to use sourcing as a tool to quickly reduce costs, implement business changes or evolve the business. This vision is normally positioned at the board level or at senior executive level, but for this category of organization, the organization doesn't have in place the experiences and capabilities to execute these changes and deals successfully.

Master:

These organizations have mastered sourcing strategies and their execution. They enjoy a competitive advantage because of it. They already understand the importance of sourcing, as well the intertwined difficulty of managing internal and external business and IT processes to achieve leading business results.

IT Budget/Spending:

The best estimate of total spend at the end of the twelve month budget period for information technology to support the enterprise. IT Budget/Spending can come from anywhere in the enterprise that incurs IT costs, and it is not limited to the IT organization. It is calculated on an annualized ―cash out‖ basis and therefore contains capital spending, and operational expenses, but not depreciation and amortization.

IT budget/spending information collected from clients includes:

From a resource or accounting perspective



Hardware, software, personnel (including travel and benefits and training), contractors and consultants, outsourcing, disaster recovery, occupancy, data and voice communications/transmission, associated with supporting Information technology within the enterprise.

Occupancy costs include fully burdened costs for the facilities being used by the staff supporting the enterprise. Some examples include office space, furniture, electricity, maintenance, property taxes, security, and office supplies. Occupancy costs for space dedicated to IT functions such as the data center and help desk are also included.

All taxes (except VAT when it is recovered or refunded to the organization).

From an IT domain or activity perspective:

The data center (servers, storage etc), client devices (desktops, laptops, PDAs, smartphones), voice and data networks (including but not limited to voice and data transmission, fixed and mobile telephony, remote access services, internet access services), help desk, application development and maintenance.

IT Support functions such as the office of the CIO, supervisory management, finance and administrative costs, such as purchasing, asset management, process management, and marketing of IS services.

Dedicated data processing equipment used in operations, production and engineering environments – Examples of this are CAD/CAM, and standard computing equipment used in devices for factory automation, and tablet PCs used by healthcare professionals

IT budget/spending information collected from clients typically does not include:

Costs for technology or services that are resold - An example of this is salaries for developers involved in building commercially packaged software.

Operational technology that is equipment built or purchased for non data processing purposes but which has computerized components – Examples of this include robotic manufacturing machines, Automated Teller Machines, specialized point of sale devices, scanners, blood pressure monitors etc.

Depreciation or amortization expenses as that could lead to double counting from an accounting perspective.

Internal ―cross charges‖ and corporate allocations related to expenses such as, early retirement, incentive bonuses, human resources, and chairperson's salary etc.

Business data subscriptions and services (such as Bloomberg), even if they are managed by the IT organization.



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