Yankee: CIOs grapple with outsourcing complexity

As companies restructure and change strategies to cope with the economic downturn, chief information officers (CIOs) must accordingly modify IT outsourcing engagements, a complex process, according to Yankee Group.

"Businesses in general, due to the economy, are facing severe pressures, and so are turning more towards outsourcing in all of its flavors for help," said Andy Efstathiou, a Yankee Group analyst, adding that spending in outsourcing is growing at an 11 percent to 12 percent rate compared with last year, and outpacing spending in other IT services such as systems integration and consulting.

"The CIO's job isn't getting easier," said Efstathiou. "The multiplicity of competing (IT outsourcing) offerings and increased business problems exponentially increases the probability of a mismatch between the offerings and the business problems."

To successfully modify their companies' IT outsourcing engagements, CIOs and other high-level IT managers must discard the notion that a company should only outsource processes that are unrelated to its core business. "This oversimplistic rule of thumb misses the point," Efstathiou said during a conference call he held last week with press and clients to discuss the topic of outsourcing.

Outsourcing isn't about parsing out core and non-core processes, but rather about improving operations in a continuously evolving business environment, he said. "All business processes are on the table for outsourcing, and, under the right circumstances, (any) should be outsourced."

These days, CIOs are engaging in two major types of outsourcing, he said. The first is the traditional outsourcing of IT tasks and infrastructure, whose main goal is to cut costs. The second is the more sophisticated and complex outsourcing of business processes -- such as payroll management, claims processing and credit card transaction handling -- along with their respective IT underpinnings.

In either case, the difficult process of choosing among the myriad outsourcing offerings in the market is often made more complicated by vendors, whose "veil of marketing hype" CIOs must pierce, he said. "The changing business environment necessitates a continuous re-evaluation of the IT environment, including the insourcing/outsourcing mix. Making the right choice in that mix is made more difficult by the confusion created by the service providers," Efstathiou said.

However difficult, clinging to the status quo isn't an option for a company whose business model and structure are changing, because a company's outsourcing mix must always be aligned with its business strategy, he said.

The key to choosing successfully an outsourcing offering is to adhere to a selection methodology that helps the CIO and his team make a disciplined and objective analysis of options. The methodology should help the decision-makers establish their company's outsourcing needs; develop a detailed proposal request; evaluate vendors objectively by breaking down their offerings into individual components; negotiate contracts carefully with the help of lawyers; and gain upper management support for the final decision.

"Firms that don't follow a disciplined selection methodology for complex outsourcing decisions generally lapse into political infighting and make decisions based on superficial impressions and internal politics," he said.

Once the choice is made, CIOs must not forget that they and other company managers must continually supervise the outsourcing engagement. "Outsourcing doesn't eliminate the need for managerial oversight. Managers need to budget resources -- both human and financial -- to oversee and manage the outsourced processes," he said.

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