The complexity of IT outsourcing
By Ron Wedderburn
July 2004
Outsourcing, specifically IT outsourcing is such a complex set of business relationships that it is hard to understand why both parties, the service provider and the client, enter a contract so full of confidence and high expectations. Even with the best intentions there are a myriad of challenges and issues that if not overcome will cause the failure of the strategy.
Outsourcing has evolved in the last decade and can now provide organisations with a set of transformation tools which, if used effectively, can differentiate an organisation's ability to compete effectively and in some cases redefine the market environment.
With this evolution, lessons have been learned and trends have emerged. Increasingly, companies are looking at outsourcing not just as a tactical, reactive move, but also as a strategic and proactive move.
Even though traditional drivers of outsourcing such as reducing operational costs, improving IT flexibility, focusing on core competencies, and increasing operational efficiency still apply, companies are also turning to outsourcing for more strategic reasons, including keeping up with technological advancements, resourcing, building partnerships, creating value for the organisation and broadening infrastructure and operations reach.
Globalisation is increasing the range of options available and companies are looking outside of the UK to find providers. Though the current market leader is India, there are many other countries, primarily China and those of Eastern Europe, which are emerging intent on taking the lead.
Essentially, offshore providers rely on cheaper labour and pass those savings on to clients. The challenge for the client is not only to understand outsourcing but also to consider the potential difficulties introduced by cultural differences, lack of specific business expertise, and geographic distance.
The complexity of an outsourcing relationship translates into both the contract/commercial terms and the 'softer' issues inherent in company culture and the chemistry of individuals.
Selecting the correct service provider is crucial. Obviously the provider is competing on cost, service, flexibility, and the availability of resources. To truly differentiate though, there has to be a real desire to build a service provider/client relationship that allows for understanding of the company's goals and objectives as well as ongoing management of the relationship.
Both provider and client must work towards creating a well-structured contract and a deep understanding of the issue of governance and how the relationship can be managed over time. Companies have to realise they need to be able to deal with unforeseen circumstances such as mergers, acquisitions and market changes. Such shifts can't always be addressed in a contract and both parties have to have a governance relationship in place to cope with such changes.
With the advances in technology and the evolving maturity of outsourcers, companies are outsourcing an ever-increasing variety of activities.
Generally, the areas most likely to be outsourced are network management, applications management, applications development, operations, user support and internet/e-commerce functions.
A challenge for companies looking at offshore suppliers is to ensure that the supplier has the necessary competence in the understanding of its clients' business models. This takes time to build and requires a conscious effort from both parties.
Study after study indicate that decisions for IT outsourcing are based on such factors as:
- Financial stability
- Technical skills
- Track record
- Domain skills
- Geographical reach
- People processes
- Quality processes
- Infrastructure
- Cultural fit
- Price.
Whilst acknowledging such factors are important, none of the above can rescue a situation where a poor working relationship exists between provider and client. To alleviate potential problems the outsourcing experience has to embed a well-defined statement of work. Both parties must select the correct resources to manage the de-facto experience, and there must be regularly scheduled meetings and reporting.
Effectively, to create the win-win relationship both parties have to subscribe to the principles of trust, confidence, responsiveness, and innovation
Even though the subject of outsourcing is certainly a very popular trend and has tremendous advantages, it is imperative to understand that this is not the only option that companies should consider when reviewing their IT strategies. Winchester White always advocates that companies consider all options before going down a potentially very expensive and perhaps erroneous route.