CIOs: Outsourcing is Overrated as a Cost Saver

This week, CIO Magazine. in continuing series of surveys on outsourcing, reported that it fares poorly as a cost saving measure:

….our cost management survey shows that IT outsourcing is usually not an effective way to reduce IT costs.

Only 15% have found it results in large savings, while 45% found it only produces minimal savings. (The other 40% do not use outsourcing.)

That 1-in-4 ratio is in the bottom quartile of the all the ways companies attempt to reduce IT costs.

These underwhelming results are consistent with other CIO Magazine surveys. In March 2007 they learned that:

* 68% said outsourcing is overrated as an IT cost-cutting strategy.
* 67% said the total cost of using domestic outsourcing vendors has been as or more expensive than doing the same work in-house.
* About half (48%) of companies below $1 billion said the same thing.

The only group that, in most cases, save money (or at least don’t lose money) by outsourcing are large companies using offshore outsourcers.

Even worse for the proponents of outsourcing, the questions were phrased so as to get respondents to focus on hard costs. For example, “The total cost of using domestic outsourcing vendors has been as or more expensive than doing the same work in house.” The phrase “same work in house” would lead respondents to focus narrowly, and many likely omitted the cost in management time of vetting vendors and negotiating the deal.

And aside from cost considerations, outsourcing also increases risk and response times, and decreases flexibility.

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One comment

  1. Anonymous

    I agree with everything said here, but then people like me who were doing the numbers many years ago, knew this ans said so.

    The problem is when this happens:
    The $104 Billion Refund

    The most absurd corporate tax giveaway of 2005.
    By Michelle Leder
    Posted Thursday, April 13, 2006, at 12:33 PM ET

    Feeling flush because you’re getting a nice tax refund this year? You’re not alone. Some of America’s largest corporations—a virtual who’s who of the Fortune 100—have been reporting their own hefty tax windfalls, thanks to an absurd provision of a law designed to create jobs.

    IBM, for example, is banking a $2.8 billion refund—well, better to call it a “tax savings”—because instead of paying the normal corporate tax rate of 35 percent on $9.5 billion in profits it earned overseas, the company paid only 5.25 percent. That’s the magic of the American Jobs Creation Act, a piece of legislation that passed with comfortable margins in both the House and the Senate and was signed into law by President Bush just two weeks before the 2004 elections.

    The AJCA, which was pushed through during the last fit of panic about outsourcing, was ostensibly designed to encourage companies to add jobs here. It gave a small tax deduction to American manufacturers, and it offered a one-time tax holiday in 2005 when corporations could repatriate their foreign income at a massively reduced tax rate. This repatriation, the theory went, would encourage R & D and capital investment in the United States, leading to new positions down the road. But, like President Bush’s creatively named Clear Skies initiative and Healthy Forest Restoration Act, the American Jobs Creation Act has not lived up to its title.

    Take IBM. According to its annual report for 2005, the company added fewer than 400 jobs worldwide last year to its workforce of 329,000 people. At the same time, IBM shed 5 million square feet of space in the United States, making it highly unlikely that any of those jobs were added in the U.S. Indeed, numerous news reports, including this Business Week article, put IBM’s head count in India at close to 40,000 at the end of 2005, more than a fourfold increase over the 9,000 reported at the end of 2003.

    Analysts anticipate that American companies will have repatriated around $350 billion in 2005 as a result of the law. While it’s hard to make a straight calculation because of the vagaries of the tax code, that works out to a savings of roughly $104 billion on corporate America’s tax bill. At Pfizer, the pharmaceutical giant that announced the single largest repatriation—$37 billion—the one-time windfall works out to approximately $11 billion. That kind of tax savings buys a lot of $600-an-hour lobbyists, though not, apparently, many scientists and salespeople. In its annual report, Pfizer doesn’t list employees by region. But the company’s total head count dropped to 106,000 at the end of 2005, about 8 percent fewer jobs than at the end of 2004.

    “It basically gave money to corporations in return for corporate contributions,” says Bob McIntyre, director of Citizens for Tax Justice. As for the law’s name, McIntyre says that Congress was “just kidding.” One of the few groups that believes the legislation has led to the creation of jobs is the American Shareholders Association, a spinoff of Americans for Tax Reform, led by conservative activist Grover Norquist. In a report last month, the American Shareholders Association said that stock buybacks, dividends and mergers, and acquisitions were up sharply because of the legislation and that this in turn had led to the creation of 500,000 high-paying jobs in the United States.

    Not so far. Some companies taking advantage of the generous tax break haven’t even tried to hide their layoffs. In January 2005, on the same day it announced it was cutting 6 percent of its workforce, National Semiconductor said that it was repatriating $500 million under the American Jobs Creation Act. Colgate-Palmolive, which in December 2004 announced plans to cut more than 4,000 jobs, brought back $800 million in overseas profits last year. The Wall Street Journal reported in December that the combination of repatriation and job cuts prompted Amalgamated Bank, which owns Colgate shares, to file a shareholder resolution arguing that the company’s brand and reputation would be damaged by such moves. Julie Gozan, director of corporate governance for Amalgamated, said the resolution was withdrawn before Colgate filed its proxy on March 31 because the company agreed to provide more information to investors on the impact of the AJCA later this year. But Gozan said that Amalgamated is considering similar resolutions at several other companies where it owns stock.

    In addition to lowering the tax rate, the AJCA required companies to rewrite all sorts of employment contracts. Mike Melbinger, head of executive compensation and employee benefits at Winston and Strawn, a large Chicago-based law firm, estimated that the typical large company might have 30 employment contracts, 10 change-in-control agreements, and various severance plans, all of which had to be changed as a result of the 2004 law. “It was a ton of work,” says Melbinger. “As much as we like to get paid, it was terrible for the clients.”

    So at least the American Jobs Creation Act benefited one group of American workers: corporate lawyers.


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