Outsourcing Information Technology? Invest Also in Internal Brain Power

Companies get better results from outsourcing IT operations if they also bolster their own internal IT investment and expertise, according to research by Sunil Mithas, associate professor of information systems. 

In-house IT managers and negotiators can ensure that vendors customize the outsourcing to the company’s strategic needs, says Mithas. His findings, co-authored with Kunsoo Han of McGill University, cover data from about 300 U.S. firms and build on Mithas’ 2012 study linking IT investments with profitability.  

Companies outsource their IT to save money, but hidden transaction costs in the contract can nullify much of the potential gains. “A firm’s own IT professionals can mitigate those added expenses by acting as boundary spanners, ensuring incentive alignment and brokering disputes if something goes wrong,” Mithas says. 

Mithas points to General Motors as an example of outsourcing done right. Staffing multiple, new “software innovation centers” has enabled GM to cost-efficiently split its IT outsourcing among several service firms under shortened terms. 

In the big picture, companies should avoid the common notion of IT outsourcing as a substitute for internal IT investments. “Investing your IT budget through both outsourcing and internal expertise gives you more bang for your buck,” Mithas says, “and in the process you can reduce your non-IT operating costs, which can be up to four times the IT costs.”