Info-Tech Research Group1 Discover the Hidden Costs of Outsourcing Avoid surprises. Uncover, measure and mitigate hidden costs.

Info-Tech Research Group2 IT leaders report that hidden costs in outsourcing add an average of 25% to the price of the engagement. Understand the hidden costs of outsourcing and take steps to mitigate them. Introduction Business and IT leaders seeking to minimize the unanticipated costs of outsourcing. CIOs and other IT leaders assessing the costs of an impending outsourcing project. IT leaders selecting a vendor for an outsourcing engagement. IT leaders responsible for managing outsourcing engagements. Both cloud-based and traditional outsourcing arrangements (Info-Tech considers cloud computing a form of outsourcing). Predict the magnitude of the hidden costs of outsourcing to get a better sense of the total cost picture. Manage your outsourcing engagement to reduce hidden costs and increase your net benefit. Decrease hidden costs both for contracts that are already signed, as well as contracts that are up for review or renewal. This Research Is Designed For:This Research Will Help You:

Info-Tech Research Group3 Executive Summary Info-Tech research shows that there are seven types of costs that IT leaders fail to anticipate at least 20% of the time. The seven types fit into four higher-level cost categories. Info-Tech recommends strategies for avoiding each hidden cost. Costs related to transitioning into the engagement: adapting to standards and training costs 1. Adapting to submissions standards: Define the process improvements you will need to work with each potential vendor. 2. Training costs for vendor staff: Reduce training costs by keeping the same vendor staff on all your projects. Fee-related costs: Fees for additional services (that you thought were included) 3. Carefully review each proposed statement of work to identify and reduce extra fees. Understand why extra fees occur in the SLA, the contract, and the proposed statement of work and take steps to protect yourself and the vendor. Management-related costs: Direct management of vendor staff and dispute resolution 4. Direct management of vendor staff: Avoid excessive management costs by defining a two-tier management structure on both sides of the engagement. 5. Time spent resolving disputes: Avoid prolonged resolution costs by defining terms of divorce for the engagement up-front. Rework costs: Unanticipated requirements and integration with existing systems 6. Unanticipated requirements: Use a two-stage process to define requirements, starting with business people and then with review by technical staff. 7. Integration with existing systems: Obtain a commitment from vendors that deliverables will conform to standards at points of integration with your systems.

Info-Tech Research Group4 What’s in this Section:Sections: The impact of hidden costs Impact of hidden costs Transition-related hidden costs Hidden extra fees Vendor management-related hidden costs Rework-related hidden costs Putting it all together Hidden costs typically add 25% to the total cost of an engagement. IT leaders must look for and measure the unexpected costs.

Info-Tech Research Group5 Hidden costs IT leaders often fail to meet cost-reduction targets because they do not take into account hidden costs that increase the cost of the engagement by 25%, on average. (Source: Info-Tech Research Group; n = 92). The impact of a 25% price increase can be substantial; CFOs have little patience for overruns of this size, particularly for outsourcing initiatives driven by cost- saving. Hidden costs of outsourcing can negate the cost savings promised by an engagement % addition to outsourcing fee due to hidden costs Someone from the outsourcing company approaches…and tells them they can provide services at…below 10% [of the normal cost]... The savings are not as advertized. - Former Senior Project Manager, Professional Services Source: Info-Tech Research Group n = 46 Excludes mixed app/infra outsourcing Hidden costs are the same for application and infrastructure projects.

Info-Tech Research Group6 For every cost that you expect, several hidden costs lurk in the background IT leaders know about some of the major costs of outsourcing, as listed in the table below. However, a host of additional hidden costs often surprise managers, leading to cost overruns. Price of the engagement Fee-related costs Expected costs Extra fees for additional services Unexpected costs Severance and staff retraining Transition costs Cost to adapt to vendor standards Training cost of vendor staff incurred by the client Cost to adapt to vendor standards Training cost of vendor staff incurred by the client Management costs Time directing account manager Time directly managing vendor staff Time resolving disputes Time directly managing vendor staff Time resolving disputes Rework costs Downtime, defect rate, etc. (quality metrics measured in SLAs) Time spent adapting deliverables for unanticipated requirements Time spent reworking deliverables to integrate with existing systems Time spent adapting deliverables for unanticipated requirements Time spent reworking deliverables to integrate with existing systems Extra charges for uploading data to cloud storage Format for requirements Training app developers to work with in-house systems Format for requirements Training app developers to work with in-house systems Checking deliverables for errors Disputing penalty amounts Checking deliverables for errors Disputing penalty amounts Adapting deliverables to work for excluded user groups Adapting deliverables to conform to master data model Adapting deliverables to work for excluded user groups Adapting deliverables to conform to master data model Example

Info-Tech Research Group7 Hidden costs, if not addressed, will add an average of 25% to the cost of your outsourcing engagement The scale of hidden costs is large relative to the cost of the engagement. Make sure you add these additional expenses to the outsourcer’s estimate, before signing the contract. These figures below are based on experiences of IT leaders in previous outsourcing engagements. Fee-related costs 3.Extra fees for additional services Unexpected costs Transition costs 1.Cost to adapt to vendor standards 2.Training cost of vendor staff incurred by the client 1.Cost to adapt to vendor standards 2.Training cost of vendor staff incurred by the client Management costs 4.Time directly managing vendor staff 5.Time resolving disputes 4.Time directly managing vendor staff 5.Time resolving disputes 3% 4% 3% 4% 3% 5% 3% 5% 3% Estimated additional cost Rework costs 6.Time spent adapting deliverables for unanticipated requirements 7.Time spent integrating deliverables with existing systems 6.Time spent adapting deliverables for unanticipated requirements 7.Time spent integrating deliverables with existing systems 3% 4% 3% 4% Source: Info-Tech Research Group n = 85 25% Total

Info-Tech Research Group8 Contract negotiation Outsourcing commencement End of contract When hidden costs occur depends primarily on the cost categories that they fall into Time spent managing Dispute resolution Ability to integrate Special use cases Cost of adapting to standards Training cost Hidden costs Transition costs Management costs Rework costs Extra fees Fee-related costs Transition costs tend to occur closer to the beginning, as the client transitions from using its internal capabilities or from using those of another outsourcer. Rework costs tend to occur near the end of the project, once the client sees the deliverable and starts to integrate it into the client environment. Fee-related costs occur throughout the engagement, in the form of an engagement fee towards the beginning and extra charges throughout. Management costs tend to occur once initial scheduling targets are met or missed, in the middle of an engagement, and it becomes clear how much management the vendor staff will need.

Info-Tech Research Group9 Contract negotiation Outsourcing commencement End of contract Watch for early warning signs of hidden costs Spiraling extra fees Poor quality of early work Failure of trial implementation Failure to communicate Performance hiccups Many points of integration Minimal testing Fee-related costs Transition costs Management costs Rework costs Corresponding warning signs

Info-Tech Research Group10 What’s in this Section:Sections: Transition-related hidden costs Danger of hidden costs Transition-related costs Hidden extra fees Vendor management-related hidden costs Rework-related hidden costs Putting it all together Cost of adapting to standards for change requests or requirements. ◦ Avoid the problem: consider resellers. ◦ Mitigate the costs: create a point contact. Cost of training vendor staff. ◦ Avoid the problem: engage vendor staff. ◦ Mitigate the costs: evaluate videoconferencing.

Info-Tech Research Group11 Both the outsourcer and the client must undergo a transition, at the outset of an engagement, before both parties can work together. ◦ The client must adapt its standards for submitting requirements and change requests to match those of the vendor. ◦ The vendor staff must undergo some level of training to work effectively with client systems. In 76% of engagements, the client either pays for or carries out at least part of the training of vendor staff. (Source: Info-Tech Research Group; n = 91) Clients frequently underestimate the cost to them of both aspects of transitioning to the outsourcing engagement. ◦ Most clients expect these costs to surface, but many underestimate the burden that these elements of transition will impose on the engagement. Aspects of the transition to outsourcing surprise IT leaders Cost type Average % that this cost will add to the cost of the engagement Cost of training vendor staff 3% Cost of adapting to the vendor’s standards 4% Adapting to standards Training costs 34% of IT leaders are surprised at the extent of this cost in their own outsourcing engagements. Make sure you properly account for it. 20% of IT leaders are surprised at the extent of this cost.

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