Why companies should not outsource IT support

Most big companies do not maintain their IT infrastructure by themselves. Instead, they outsource this job to another company, which usually calls itself a solution provider. A single solution provider can take care of IT resources of many different companies.

The outsourcing company usually claims that keeping their own IT support team would be more expensive than outsourcing. I believe this is a fallacy, and here is why.

Firstly, consider an organisation (let’s say it’s a bank) that has its own IT support team. This team is shown on Figure 1.

An internal IT support team.

An internal IT support team.

Say, the team consists of 20 people, which is just enough to keep the IT infrastructure up and running. Obviously, his team needs a manager. The manager is responsible for task allocation, making sure that not all of the team take holidays at the same time, conducting end of year performance reviews — in short, the manager does not do anything useful for the bank’s IT systems. The manager represents the overhead which is needed for the team to work well. In other words, the bank pays salaries to 21 people, but only 20 of them do some useful work.

Next, let us consider the case where the bank has outsourced the IT support to another company, the solution provider. The solution provider is a big company that serves many different clients. Suppose our bank still needs 20 people to maintain its IT infrastructure. Like before, these 20 people need a manager. However, the solution provider is a big company that consists of many such teams. Their managers, in turn, have higher-level manager, that oversees multiple teams. These higher-level managers report to other, even higher, managers, and so on until the pyramid converges to one person, the president of the company. This is shown on Figure 2.

Outsorced IT support.

Outsorced IT support.

Here, the bank that uses the services of the 20 people, pays not only their and their manager’s salaries, but also a fraction of the salaries of all the higher management up to the top (otherwise, where would their salaries come from?)

Paying just a bit more for the same amount of work would not be such a big deal, but it does not stop here. There is one more figure that stands between the bank and the solution provider: the account manager. The job of the account manager is to make the bank pay as much as possible for the services it receives. Guess where the account manager’s salary comes from? Also from the fees that the bank pays to the solution provider. The bank, in fact, feeds its worst enemy.

But wait, before the bank decided to outsource its IT support, they made calculations which showed that the fees of the solution provider are lower than the costs of having IT support inside the company. How did they do these calculations? The trick is to design outsourcing such that the solution provider will have to do less work than an internal support team would have done. Let us look at an example.

One morning at the bank that I am consulting, my Microsoft Access application crashed and damaged the database file. “No big deal,” thought I, “the files are on a network server, which is backed up nightly. I can ask for the last night’s backup.” It should take no longer than an hour to restore a file from a backup, right?

I phoned the bank’s IT helpdesk and explained the problem. “Ok,” said the person on the other end of the line, “I will make a ticket for the backup/restore team. You can expect the problem to be solved within 24 hours.” “Can it be done quicker?” asked I anxiously. “I need this file to complete an urgent task.” “All I can do is make a ticket,” answered the helpdesk person, “the rest is up to the backup and restore team, and they have 24 hours, according to the SLA.”

The bank has an agreement (Service Level Agreement, or SLA) with the solution provider, which specifies the time allotted to solving IT problems. As long as the solution provider conforms to the SLA, they have little incentive to hurry up with doing their job.

Bottomline: outsourcing IT support looks attractive on paper, but in reality the bank gets much less work done for the money they pay.

I am not trying to say that outsourcing is generally a bad idea. In many cases it is exactly the thing to do. Every two years, the banks needs to repaint the facade of its office building. It hires services of a painting company. The painting company does the job in a week and paint some other facades before it is time to repaint this bank again. There is no reason to keep the painters on the bank’s payroll.

Now let us look at three more arguments that are often used to justify outsourcing, and see why they do not apply to IT support.

1) Doing IT support is not the bank’s core business.

This argument would only work if one believes that a
company doing only its core business is good for the company. This is simply not true. Say, the core business of a railroad is to bring passengers from one place to another. If the railroad decides not to sell hotogs on the platforms because “selling hotdogs is not our core business”, someone else will do it and take all the money.

2) IT solution providers have more expertise in IT support than the bank.

This is not true either. They just hire anybody who is willing to work for the salary they pay, train them quickly and send them to the customers. When the bank owns its IT support, it have much more control of the quality of its workforce.

3) Outsourced work can be done in other countries where wages are lower.

This was true several years ago, but by now the people who can do the work became expensive regardless of their geografical location. The people that remained cheap are probably not a good hire even for a low salary. Besides, IT support requires the engineer’s physical presence at the customer’s site so often that one has to keep a fairly big team  co-located with the customer anyway.

So, why do so many companies outsource their IT support? The reasons are plentiful, for instance:

1) It looks good on paper. The manager who has outsourced IT support can claim that he has saved a lot of money for the company.

2) It shifts the responsibility to the solution provider. If an internal IT support group messes things up (people do make mistakes every now and then), their manager gets the blame. If an external solution provider messes things up, they are to blame, not the manager who outsourced the work to them.

3) Due to the herd instinct. Outsourcing is popular, so people tend to do this because everyone else does. 20 years ago a vast majority of males smoked for exactly the same reason.

Sadly, many companies continue to outsource their IT support, and are likely to continue to do so in the future.


About Alluve

Alluve develops and markets software solutions for assessing risks on the portfolios of financial derivatives. Our product, Alluve MarketSimulator, uses Monte-Carlo simulation to calculate risk measures, such as value at risk (VaR) and exposure at default (EAD).
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