I’ve been doing research for several reports on the topic of IT outsourcing, some about utilizing cloud computing for hardware and some about working with vendors to handle consulting and development. While these two areas are conceptually very different, the approach and business values are quite similar.

One misconception about both is that they are used for “replacement.” By this, I mean that an insurer uses cloud computing to replace their data center or an insurer utilizes an IT service provider to replace their IT organization. While in some instances this might be true, it is rarely the case.

The other misconception is that an insurer uses cloud computing or consulting services to lower costs. Lower cost might be one reason, but shouldn’t the only reason. Many CIOs, however, do approach IT outsourcing primarily for the perceived cost benefit, and Celent sees this as a mistake. In many cases, some or all of the long-term costs might actually be higher. This does not mean a cost-sensitive insurer should avoid IT outsourcing, but, rather, should proceed with an outsourcing project while looking at the overall business values associated with it.

The added business values are the other area of similarly for hardware and development outsourcing. Both help a company increase capacity—one with increased server capacity and the other with increased human capacity. Both help a company access new capabilities that they didn’t have earlier; cloud computing providing rapid server deployment and failover (among other things), development outsourcing providing resources with skills sets that did not exist in house. And, finally, both work best when thought of as a long-term strategy that will complement the existing IT and not just as a temporary measure or as a replacement for existing resources.

The takeaway is that any organization looking at IT outsourcing–whether for hardware, software, or people–should focus not on cost, but on long-term business value. Organizations that only care about cost are often disappointed by the outcome. Organizations that have a strategy to bring new capabilities and business value to users will be successful.

This blog has been reprinted with permission from Celent. Jeff Goldberg is a senior analyst in Celent's insurance practice, and can be reached at jgoldberg@celent.com.

The opinions posted in this blog do not necessarily reflect those of Insurance Networking News or SourceMedia.

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