Orange County reports limited outsourcing savings

A preliminary government report indicates that an information technology outsourcing project in Orange County, Calif., has produced only marginal savings.

Orange County works with outsourcing vendor Affiliated Computer Services (ACS), a Dallas-based company. The report, which the county compiled, indicates that ACS has been providing IT services at an annual average cost per full-time equivalent (FTE) of $119,500. The figure for county employees is $120,223. The cost difference of $723 works out to less than 1 percent per FTE.

An article in the April 17 Los Angeles Times states that the report may spark an effort to bring IT work back in-house. An Orange County spokeswoman, however, said the county’s report was not a complete, in-depth study.

Andy Efstathiou, research director at NelsonHall, an analyst firm that tracks the outsourcing market, said organizations considering outsourcing look for cost savings of at least 20 percent.  He said more aggressive firms may seek 25 to 30 percent savings.

“In business, the standard hurdle rate is 20 percent cost savings or better,” he noted. The hurdle rate is the threshold above which an outsourcing move or other investment decision makes sense and below which it may not.

Efstathiou said, however, that most outsourcing contracts end up saving somewhat less money than anticipated. But he added that even 15 percent savings -- when 20 percent was expected -- would still represent a good result.

The Orange County report, meanwhile, included a table with the pros and cons of outsourcing. On the plus side, the county listed “flexibility in maintaining staffing levels” and “specialized limited-term skills.” On the downside, the county cited a “lack of direct control of staff.”