Why does IT Outsourcing Increase Software Licensing Cost?

The Business Software Centre Ltd (TBSC) conducted joint research with Professor Ashraf Labib from Portsmouth Business School, University of Portsmouth about software licensing costs across public sector organizations in the UK last year. With over 400 respondents, the research reveals that a quarter of respondents outsource their Software Asset Management (SAM). The research also shows organizations who outsource SAM have higher than average software licensing costs.

Quality improvement and cost savings were the most important reasons to outsource SAM. However, the research shows that this model is the most expensive in comparison with in- house and shared SAM management.

 Average Software licensing cost per user per year (£)

Software Asset Management is becoming increasingly complicated and organizations do not have all the necessary skills in-house. The providers, in contrast, specialise in IT and can call upon a larger pool of skilled workers. However, significant cost reductions arise where the user organizations retained small in-house IT teams with key skills to allow them to develop new ideas and support strategies.

But why outsourcing SAM completely is so expensive? and how should the challenges be handled?

Improved quality and cost reduction

Several of the respondents believed that they could have improved quality and reduced costs far quicker through outsourcing. Respondents that focus excessively on price can result in the provider cutting back in other areas such as innovation and supporting strategically and have a negative long-term impact. Several respondents sought to achieve best value. However, these cases showed that a focus on long-term goals and building a working relationship can lead to better results.

Thus, whilst cost savings are important, organizations should adopt a balanced approach to outsourcing to achieve best value rather than simply lowest cost. Indeed, this research shows that the results of outsourcing are not instantaneous and prove that those that primarily focus on cost savings are often less successful than those who target “more value adding activities”.

Access to expertise

Access to external expertise was considered an important reason to outsource SAM. This is because SAM now requires a range of different skills, not all of which respondents can provide internally, and is constantly changing. In contrast, service providers specialise in SAM and can therefore call upon a larger pool of skilled workers. However, whilst gaining access to expertise is important, respondents need to retain key skills in-house.

Recruitment issues

Recruitment issues were the most important motivation for outsourcing 10 years ago. This is evident at two organizations, who both outsourced initially around 2000, who found that the inability to attract skilled staff, due to higher pay in the private sector, was the main reason to outsource. This was partly because the millennium bug had created a shortage in the supply of skilled IT staff and pushed wages up. Recruitment issues now appear to be less important. This could be because respondents are beginning to recognise the importance of IT and the need to offer higher wages to attract skilled staff and have become more commercially orientated.

Focus on core competence

The respondents also outsourced SAM to transfer the responsibility and risk of managing routine activities so that the in-house team could spend more time and energy focusing on strategy. This allows respondents to transfer responsibility for  failures, ongoing costs, and staffing whilst the council only have to manage the contract. This is considered an important reason to outsource. This illustrates that improving the service by reducing costs and improving quality takes priority over strategic considerations at local respondents. IT is more complicated than other support functions that are traditionally outsourced, and therefore it takes longer than anticipated managing the contract and dealing with problems, thus resulting in less time to focus on strategy. The respondents, however, are becoming increasingly reliant on IT and see IT as the key to transforming service delivery. The respondents, thus, expected outsourcing to support strategy.  The respondents that opted for long-term contracts concentrated more on improving quality and transforming the service. It is noted that the lack of strategic support was one of the main reasons outsourcing did not meet expectations. The use of outsourcing to support strategy could explain the recent increase in SSPs, signed between respondents and service providers, and the increasing focus on shared services. This is where respondents come together to pool resources, such as combined data centres, to achieve higher levels of efficiency in-house. This, combined with the recruitment of private sector managers with commercial experience, can give respondents greater leverage when outsourcing and allow them to focus more on strategy.

Flexibility and restructured costs

It was difficult to write flexible contracts and changes were subsequently difficult and costly to negotiate unless they were in the provider’s interest. One council reported improved flexibility. However, they only achieved flexibility after putting the contract aside and developing a partnership. This suggests that partnerships based on mutual benefit will make the provider more open to changes.  It also gives the provider greater incentive to improve the service although the council had to sign a long-term contract to enable the provider to recoup their investment costs.

Conclusion

The research shows that a shared SAM management arrangement model runs software licensing in the most efficient way. It is generally accepted that software licensing can be complex so there appears to be advantages in having input from external expertise. The respondents should retain in-house IT staff with SAM skills to allow them to develop new ideas and support strategy to validate the work of any external suppliers. This allows respondents to share responsibility for efficiency and savings.

In summary, significant time and effort needs to be taken to manage the service after outsourcing, and that outsourcing will help organizations achieve the efficiency and be responsive to business change.