A Strategic Guide with insight from THE CENTER FOR DIGITAL GOVERNMENT
The first step in investigating whether out- sourcing is the answer to the organization’s needs is to evaluate the tasks and processes that are being performed within an organiza- tion to analyze the costs and value proposition of those tasks. Cost reduction is usually what convinces elected officials and local govern- ment executives to outsource. A business case enables government leaders to compare the costs of outsourcing with the costs of perform- ing the services in house. The business case should also include an evaluation of the risks and benefits of moving forward with one alter- native over another.
One recommendation is to visit other govern- ments using outsourcing, which helps to visualize the results. Seeing how other organizations have implemented outsourcing helps leaders under- stand the impact within their own jurisdictions and how it can help to increase efficiency and employee and constituent satisfaction.
Building a Business Case A thorough business case outlining costs, ben- efits and risks must be made for outsourcing. The first step in evaluating whether outsourcing is the right decision is to complete a cost analysis. The total cost of performing the activity in house should be compared to the projected cost of outsourcing the activity. The business case should include both quantitative and qualitative benefits and their impact.
Full-time employee costs are usually the great- est cost factor of performing the activity in house. Other significant in-house costs to con- sider include software and equipment acquisi- tion, maintenance and modernization, applica- tion design development and implementation, and backup and recovery. Management time, training, recruitment, turnover, and facility and supply costs may also be significant bottom-line contributors.
Outsourcing costs include time for putting the outsourcing proposal together, annual out- sourcing fees – including anticipated future pricing adjustments, training of the outsourcer on business processes of the organization, and any additional ongoing costs, such as project management time to manage the relationship between the outsourcer and the organization.
After completing the cost analysis, the business case examines the benefits. This step is the value proposition. The business case compares alternative courses of action. The negative impact of not outsourcing should be consid- ered. For instance, the risk of not moving for- ward could lead to lost data from failed back- ups or reduced productivity because of using older technology.
The major consideration in developing a needs analysis is that the results need to satisfy four objectives, at a minimum:
Show how outsourcing reduces costs.
Demonstrate how outsourcing adds value.
Educate elected officials on the performance impact.
Provide enough evidence to gain support and buy-in.
Outsourcing benefits include access to top-of- the-line technology and resources that can improve delivery of mission-critical issues. Other key benefits include controlled costs, reduced risk of system downtime and overall increased efficiency.
In Minneapolis, IT outsourcing is expected to cut operating costs by $20 million over seven years. Two million dollars of that is related to avoiding lease space for the data center. Another major area of savings is in technology refreshment. The city was spending 60 percent of its budget and management time just on infrastructure operations, including its laptops,
desktops, databases, servers, and networks. Outsourcing drove savings in all of these areas in addition to providing 24-hour help desk and a back-up system that the city previously lacked.
Many local governments use a consultant to lend expertise to the analysis. Local govern- ments who obtained buy-in from elected offi- cials and other city or county executives found that consultants help to provide both project- level experience and credibility to convince the leaders to move forward.