When Keith Pallesen, sourcing consultant for GMAC Mortgage, hires outside firms to perform tasks such as managing his company’s travel arrangements or inventory, his main concern is increasing the lending company’s market share.

“In the end, I’d rather spend money on things that are crucial (to the growth of the company’s core business),” he insists.

Al Garcia says saving money was a secondary motivation when he decided to outsource his network servers to AT&T more than a year ago. “It gave us the ability to have top-level support that we couldn’t hire internally,” says the vice president of information technology at Comac Inc., a wholly-owned subsidiary of Boston-based Iron Mountain. His primary goal was to assure his network never goes down. “It was a qualitative thing,” he adds.

Mahipal Komatreddy, vice president of engineering for Transport Edge, a division of WFS Corp., explains that flexibility was his main motivation for outsourcing the marine and aviation company’s software development to India. “We were able to get the highly skilled people we want even though we are a small company,” he adds. “We have software development comparable to a large company. We get the right people for the right amount of time and then let them go.”

Clearly, outsourcing is no longer just about saving money. It’s now about doing things quicker, more efficiently, getting to market faster than your competitors, having maximum flexibility with your workforce and gaining access to high quality employees you otherwise could not afford.

The diminishing role that cost saving plays when deciding to outsource is highlighted in the Outsourcing Institute’s Fifth Annual Outsourcing Index, an online survey of 1,110 buyers of outsourcing services.
When asked what are the three primary reasons for outsourcing, more respondents singled out “improving their company’s focus” (55%) than any other factor. Alas, the second most popular response—reducing and controlling operating costs—was cited 54% of the time.

Not much of a difference, right? Keep in mind, however, that until recently saving money was regularly given as the priority among purchasers of outsourcing services. In fact, in the Outsourcing Institute’s 2001 IT Index, reducing and controlling operating costs was singled out by most respondents (48%). Improving their company’s focus was a distant second, identified by just 40% of that survey’s participants.

What’s more, in the 2002 survey representatives from smaller and medium-sized companies were much more likely to cite improving their company’s focus than reducing and controlling expenses.
To better analyze the survey’s data, we broke the responses into six groups based on the size of the company—fewer than 500 employees, 500 to 999 employees, 1,000 to 2,499, 2,500 to 4,999, 5,000 to 9,999, 10,000 and above.

Some 58% of respondents from the smallest companies—fewer than 500 employees—listed the focus issue as a primary reason for outsourcing 58% of the time versus just 41% who mentioned saving money.

Officials from medium-sized firms also said they were more interested in improving their company’s focus than just saving money.
For companies with 500 to 999 employees, the disparity of responses was 60% versus 52% while the gap for the 1,000 to 2,499 group was 63% versus 57%.

On the other hand, the three groups representing the largest companies are still more concerned about saving money. Perhaps old (read large) dogs are hard to teach new tricks.

The declining role of cost saving in this year’s survey is especially significant given that most respondents made their choices in the midst of a recession. One would think this is precisely the time that cost consciousness would be the paramount concern at most companies.
In fact, chances are many of the individuals who responded to the survey between January and June of 2002 work for companies that are not only carefully controlling spending, but are undergoing layoffs or have hiring or wage freezes in place.

> Part 2