Recently, there have been a plethora of articles on how outsourcing can meet the challenges of these difficult economic times by reducing costs to companies. No doubt, successful outsourcing can save a decent amount of money over time, but most recorded experience indicates disappointment with the total savings.

This blog, and many others, have talked about the possible reasons for this. Incomplete requirements definition, weak customer-side management, opportunistic supplier behavior and currency fluctuations are the usual suspects. However, I think that there is one major, unsaid reason - customer's near-rabid focus on cost cutting.

Because of this focus on cost cutting - at all costs - departments are forced to cut budgets below what is necessary to operate the busines on a reasonable basis. Outsourcing vendors are glad to accommodate this, reducing first-year costs to sell the deal, and recognizing that the money can be made up on the tail end. And often it is.

This is why vendors prefer long term deals - and price them accordingly. In a long term deal, they can reduce the first-year (and sometimes second-year) budget numbers to an attractive level, raising 3+ year profitability. The result are deals that get by the CFO and CEO because they meet the immediate budget needs (and because the lifespan of CIO's is often far shorter than the deal), followed by a headache that is left to be deal with by their successors.

At the end of the day, it is important to remember that outsourcing also costs money, and that vendors need to be profitable - just like customers. If the costs are low this year, then they will be made up in future years. It is after all, a zero sum game.