Sunday, 3 June 2007

Is IT Outsourcing Right For You?

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Whilst the challenge of business process outsourcing may still seem a leap too far for many businesses, IT outsourcing continues to generate much interest among companies in the UK (Europe is still quite some way behind the UK in this area and it is by no means certain that they will make the switch, instead they may simply leapfrog to BPO or beyond).

Perhaps it is the lure of being able to reduce back office costs by around 3%, or being able to contain, what for many, was the out of control upward spiraling IT costs that drove initial interest. Post 2001, however, many companies saw it as a quick way to raise cash – selling of their IT assets and then in effect leasing them back, and reducing headcount of non-core people at the same time.

Whatever the driving factor, there are many lessons learned, that would be clients for outsourcing would be wise to study before making the leap into the relative unknown. Unknown? Yes, for any of the hard lessons are buried deep and it can be hard to get beyond the hype.

Whilst there is much new interest in IT outsourcing, there is also a great deal of antipathy towards it and will be until the scars and the corporate memory of the failures fade, especially among those who tried it early. Many are now realizing that among the coal they sold were hidden diamonds, diamonds which are proving very expensive to get returned.

Of course the papers are full of new and ever greater contracts being awarded and won. But, it is not that long ago that we were reading about contract after contract being terminated with great acrimony all round. Indeed only in the past month we hear that the Inland Revenue are about to attempt, what for many observers could well be, the impossible, to switch providers after years of service. Many will be watching this transition with interest, if it works, then we can look forward to many more firms trying to make similar switches.

A couple of very quick lessons that have come out of contracts to date; there was too much emphasis on short term cost savings and not enough focus on improved quality or delivery of service. Those contracts were written in haste by people who were not really sure what was expected, with the result that many of the savings did not materialize, that there was not enough flexibility and that they did not take into account changes in the business. t To achieve real "step change" in terms of cost savings requires the outsourcing to go "off-shore." Taking outsourcing off-shore though provides other interesting communication and logistic challenges, and don't assume that just because India and Singapore are where everyone else is going you should be too. It is likely that in the not too distant future we will see Russia and Eastern Europe taking centre stage, before perhaps we look towards China.

The most important question to consider when looking at IT outsourcing is just how important technology and systems are to you business? If you think that through the intelligent application of technology that you can gain competitive advantage (or that others may gain against you!) then the probability is that you need to think beyond the original types of contracts, which basically saw firms give up all control over their systems. To outsource software development (assuming that you do not just use packages) makes sense, not many companies want to be in the software development business. To outsource the maintenance of hardware and systems along with the associated helpdesk makes sense. But, to outsource the decisions on what systems you can or will use and what software you may or not run in your environment probably makes no sense today.

Perhaps the biggest mistake that many people made was that they outsourced entire functions or departments, thus not only losing equipment and systems, but the knowledge of the staff that understood the "how" and "why" regarding those systems.

One American company, Volkswagon, had sold off and outsourced their IT functions to another group company Gedas. They subsequently re-hired business analysts to document and own their business processes and analyze why there were using so many different and duplicate systems. The results were pretty astounding; they are reporting 20% reductions in their outsourcing costs, greatly improved quality of service and increased customer satisfaction. While on the other side, Gedas, are having to admit that the new contracts and reductions in costs associated are reasonable, although I am not sure that they like the transparency of the new arrangement or that Volkswagon is taking more responsibility.

As we look to the future we are going to see great confusion in the marketplace. Not convinced about pure cost savings companies will look to ways of increasing quality and productivity, and here is where the cross-over with Business process outsourcing comes in. Of course some will look to business process outsourcing as just a means of taking those back office savings from the 3% to the 5-7% that some analysts suggest.

A recent survey by IDC suggests that over 60% of organizations are looking at Business process outsourcing and that over half of those believe that business process outsourcing is now an accepted practice. They see that Business Process outsourcing helps them create "virtual enterprises", accelerate organizational change, improve processes and to focus on revenue generation opportunities.

It is this mix of trying to sell/buy IT outsourcing contracts and then trying to leverage the Business process outsourcing benefits that will lead to the confusion. The two are not compatible! You can't expect to give everything away and then manage it remotely. You have to decide first and foremost what is important to the business you are in or wish to me in, then work out which aspects might lend themselves to being outsourced, only then can you select which type of outsourcing is appropriate. Something made all the more difficult with suppliers positioning themselves across both camps.

In summary, IT outsourcing is not right for as many companies as people think. Business Process outsourcing is probably a flawed concept and just a new way of trying to make functional outsourcing appeal to a broader audience. The two biggest assets in any business are the people and the processes, in both cases the management and responsibility has to remain in-house. Only "support" tasks/activities/functions should be outsourced and only then when you are able to explain to your potential supplier the processes you wish to have supported and the flexibility you need to be in a position to guide and drive your business

Note: This article first appeared in 2003 on Mark McGregor's series of articles on and in Finance Today Magazine


web said...

There is a lot of competition in outsourcing software development, as there are many firms across the globe catering to clients looking for outsourcing their work. What is good is that the takers can choose the best from the lot.

Hill said...

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