Today, few businesses don't outsource part of their IT department. According to IT research and consulting firm Gartner, global IT outsourcing spending is expected to reach hundreds of billions of dollars in recent years. In addition, the development of cloud computing will also make IT outsourcing more common.

For many companies, reducing operating costs is the primary goal of IT outsourcing, but not all companies can achieve it. One of the reasons for the failure to meet expectations is that managers only consider IT costs. However, our research shows that outsourcing IT can also help companies reduce sales and overall management costs, which are typically four to five times the cost of IT. When managers see IT outsourcing simply as a replacement for in-house IT investments, many potential cost benefits are obscured.

Our research division is based on data from approximately 300 U.S. companies between 1999 and 2003. The study found that when a company's IT outsourcing expenses increased by $96.14 million, its non-IT operating costs decreased by an average of $121.14 million.

We also found that IT outsourcing is not a substitute for in-house IT investment, especially IT staff salaries. While outsourcing tends to significantly reduce non-IT operating costs, these cost advantages are more pronounced for companies with higher in-house IT investments. We believe this is because IT outsourcing can improve the operational efficiency of a company's existing processes, freeing up some company resources to reallocate. In addition, the complementarity of IT investments within a company can increase the informatization of business processes and optimize collaboration with suppliers, thereby amplifying the cost savings of outsourcing.

An interesting result of this study is that of the components of in-house IT investment (hardware, software, staff, etc.), only the staff component is associated with reductions in non-IT costs from IT outsourcing. This is because IT personnel play an important role in outsourcing management: they not only ensure that the supplier can perform tasks that cannot be specified in the contract, but also assume the function of internal communication between customers and suppliers.

We believe this conclusion will hold as more and more companies start to consider increasing the proportion of outsourcing and cloud computing. Our conclusions can help managers develop strategies and allocate budgets. First, managers need to find a balance between investing in in-house systems and outsourcing to save even more money: simply replacing in-house IT with outsourcing will not be particularly effective. Additionally, managers should analyze the impact of outsourcing on non-IT costs and design strategies to maximize cost savings.

More broadly, just measuring IT costs relative to competitors may not be as effective. IT can reduce promotional, sales, and R&D costs, but the cost savings may be offset by increased overhead from the IT department itself. Overemphasizing IT's ability to reduce costs can lead managers to ignore it. Managers should remember that it is the overall cost of the company, not just the cost of IT, that ultimately affects profitability.

Finally, managers should exercise caution when transferring in-house IT staff to vendor companies (as is common in outsourcing). Internal staff go a long way in helping companies capture the value of outsourcing. To maximize the value of outsourcing, companies should continue to invest in in-house IT staff to enhance their professional skills through education, training, and industry-relevant experience.

Shanghai Senior Role has been focusing on one-stop IT outsourcing business, IT system integration services, and IT operation and maintenance management services for decades.