Will IT Outsourcing Really Cut Costs? E.ON Says It Does

I write about a lot of IT topics, in addition to IT outsourcing. I cover virtualization and cloud computing, for example. I also regularly write about RFID, and supply chain management and other enterprise software. One of the recurring themes across all these categories is their promise to cut costs.

Virtualization, after all, promises to reduce the amount of physical servers and thus power consumption and cooling requirements. RFID can be used in a hospital to keep tabs on medical equipment, such as wheelchairs, so hospitals always know where equipment is when it’s needed and thus keep inventories down. And on it goes.

IT outsourcing, too, promises to cut costs. At least that’s what E.ON is hoping… and apparently achieving. The investor-owned energy service provider, based in Düsseldorf, Germany, last year initiated a five-year outsourcing deal with HP worth $1.4 billion that covered the management of data centers and PCs and will ultimately include the provision of ‘private cloud’ computing. HP will also act as IT integrator. In addition, E.ON outsourced its network management to T-Systems; the value of that deal was thought to be about $803 million. Both deals are part of the utility’s so-called Perform To Win strategy, which is aimed at improving processes and creating efficiencies. So earlier this week, E.ON announced that it has saved more than $1.5 million during the last year. You can read more about it in this ComputerWorld UK article.

The transition to outsourcing affected about jobs. E.ON moved about 1,100 of its staff are moving to HP and approximately 300 to T-Systems. The 2,700 remaining in E.ON’s IT department will continue to decide IT strategy, and run applications, security and the main power station control systems, according to the ComputerWorld UK article.

It’s a good think E.ON is cutting costs. According to reports, the company warned that earnings this year will fall sharply as it reported a 28 percent decline in 2010 net profit to $8.79 billion. The company attributed the significant decline to the fact that its wholesale gas-selling business has to buy natural gas under long-term contracts for more than it can sell the gas. It also predicts a hit to earnings from a nuclear fuel tax in Germany.

It’ll be interesting to watch whether E.ON continues to see cost reductions. I’m hopeful, as I’m sure the company is. In fact, my bet is that they are more than hopeful. I imagine they are expectant. But not all mega IT outsourcing deals save money. And not all new technologies deliver cost cutting as promised. Just recently I participated in a survey that queried IT executives about whether their virtualization initiatives were delivering the savings they had expected. The answer? Surprisingly, when asked whether virtualization has delivered significant cost savings, almost 65 percent have been disappointed. Sixteen percent said virtualization has not delivered significant cost savings, and 5 percent said the complexities of virtualization have actually introduced new costs!

What do you think readers? Does IT outsourcing really cut costs? Will E.ON’s initial savings continue? Let me know what you think.