The Next Wave of IT Outsourcing
The next wave of IT outsourcing must be transformational – not transitory
Aug 8, 2006
As the next wave of outsourcing gathers momentum, CIOs and other CXOs are rightly exploring what it means to go beyond cost-focused outsourcing. While cost reduction often is a valuable component to an outsourcing relationship, there are wider gains in performance, productivity and growth that can be seized if companies take a value-driven approach to outsourcing.
Jeffrey Immelt, CEO of General Electric, has been asking himself and his colleagues in recent years which of the company's activities are core, differentiating competencies and which ones are merely peripheral. How, he wanted to know, can GE capitalize on its core strengths?
He concludes: "At GE, 60 percent of our resources are in the 'front room' - customer-facing, growth-driving, manufacturing, selling, and controllership. The other 40 percent of our resources are in the 'back room' - supporting as well as compiling and passing information. This will change. Digitized companies in the 21st century will have significantly smaller back rooms with more resources committed to growth and customer success."
Financial services giant Wachovia Corp. recently signed a $1.1 billion contract to outsource finance, accounting and human resources activities. It's "what we need to do to become a great customer-relationship company," says Peter J. Sidebottom, director of corporate development. Wachovia intends to reinvest as much as 40% of the $1 billion it hopes to save over three years into channels and personnel to enhance the performance of its core business.
Such perspectives show that executives are thinking beyond the cost reduction elements of their outsourcing initiatives to the value-creating opportunities they generate. Gartner recognizes three key reasons to outsource IT. One is efficiency or the reduction of costs. Another is enhancement - the incremental improvement of business operations. And, finally, there is transformation - changing how a company competes or creates value to drive gains in business performance. All are valid reasons. The key is to ensure all executives agree on the objectives and that those objectives are clearly understood by the outsourcing provider.
Transformational outsourcing represents the next wave. Companies are seeking outsourcing partners that can help them elevate performance, further differentiate themselves and generate new levels of growth. To accomplish these objectives, however, they will need to collaborate effectively and take into account the wider array of benefits that can emerge in a dynamic outsourcing relationship. Among them:
Building organizational capability - One of the key elements of the new outsourcing value proposition is the opportunity to create or enhance key capabilities within the enterprise. Specialization affords the outsourcing provider the ability to build deeper strengths, assets and talents in its chosen field of endeavor. The more deeply it provides its services, the more powerful, focused and skilled its capabilities become. Through effective collaboration, companies can gain access to these capabilities from their outsourcers. This may enable them to divest back office operations and refocus their resources on truly differentiated activities - or even to incorporate these capabilities into their front-office, core offerings and take them to market.
Infusing best practices - Outsourcers have access to the best practices (and knowledge of the worst practices) in the field. Through hard-earned experience, they have learned how to most effectively provide a capability or deliver a service. Their clients realize the benefit of this knowledge and skill by working with them. It is far easier to operate at the top levels of one's profession when one's offering is a core capability or competency. That is one of the chief benefits of IT outsourcing. Few companies differentiate themselves on the basis of their underlying IT capabilities (though quite a few incorporate them into the core offerings). But IT outsourcers do. They bring them and even transfer them to their clients. These best practices enable IT organizations to operate at the top of their game.
Driving continual improvement - In a well constructed and managed outsourcing relationship, IT organizations will continue to improve and deliver incrementally higher performance throughout the enterprise. Processes will be more effectively designed, monitored and enhanced. The outsourcer can provide the leadership and impetus to drive these performance improvements - and ensure they are delivered. Indeed, these improvements should be recognized as a core element of a service level agreement.
Delivering value assurance - IT organizations face a great many risks in terms of their ability to keep up with constant changes in technology and talent. Outsourcers can help their clients mitigate risk by managing the resources necessary to deliver a vital capability. They take responsibility for procuring and implementing leading technologies, while hiring, training and developing core talent. As the pace of technological change intensifies and the talent necessary to capitalize on new opportunities gets more specialized, outsourcers provide assurances that these core capabilities will be available.
Ensuring operational excellence - Hyper-competitive markets are unforgiving markets. Enterprises increasingly must be able to demonstrate operational excellence in all areas of business. If those areas are not core, differentiated strengths, then the strengths must be procured elsewhere. One of the key value propositions of outsourcing is the ability of the outsourcer to ensure that top levels of quality are provided and maintained.
Ultimately, the value equation that outsourcers bring to a potential business relationship must be explored and enshrined as a working agreement. Apart from one's outsourcing objectives (whether they are focused on efficiency, improvement or transformation), one must negotiate this initial agreement with a larger sense of business value and impact in mind.
Companies that surrender the sourcing process to procurement managers that care only about price plant the seeds of their eventual disappointment. The trouble with many centralized procurement organizations is that they have no clear sense of the business objectives and processes that outsourcing is designed to address. Procurement managers are typically incentivized to cut price down to the bone. However, the outsourcer will be hampered and hindered at the outset of the relationship if price is the guiding criterion for the decision and the various elements of business value are not factored into the final agreement.
The business benefits listed above can and should be valued in the final deal. The ability of an outsourcer to infuse best practices and generate continual improvements should be recognized, valued and encouraged. However, if these elements of value are given short-shrift and the outsourcer is incapable of making money, then both parties ultimately will fail. Flexible agreements that encourage the sharing of risk and reward - the extension of business value - are essential to mutual success.
(John Bostick is president and CEO of dbaDIRECT, which provides data infrastructure management services to Fortune 1000 and Private 500 firms, including Best Buy, Big Lots, Warner Brothers, Procter & Gamble, Booz Allen Hamilton, Brookstone and Alberto Culver. Contact him at john.bostick@dbadirect.com.)
