Analysis: Outsourcing reloaded

Outsourcing is here to stay! A recent Gartner Survey indicated that 58 per cent of Australian companies outsource at least one of their IT operational functions. No matter how negatively it has been portrayed recently, outsourcing will continue and will play an even greater part in the evolution of Australia's IT landscape.

Outsourcing, in a generic sense, has always been around. Some 25 years ago, farming out work to third parties was a well-entrenched part of a typical IT shop's processes. Data entry, punchcard coding, microfilm and microfiche processing, tape vaulting services, and high-volume printing were mostly performed by what today we would call external service providers (ESPs).

Outsourcing helped establish the information age

Even before this, at the dawn of the information age, the basic outsourcing model was created. In fact without it, the spread of the benefits of computing could not have happened as rapidly. In the late 50s and 60s, computers were expensive, large, and very complex to maintain and use.

Governments and large universities were the first to install mainframes. The cost was so great that these organisations sold or shared processing time on their systems to defray costs, provide services to those who couldn't afford their own systems, and to ensure that the machines were used as much as possible.

Some organisations built on this and established their own processing centres as businesses or shared services centres, and so the IT bureau was born . . . the first and most basic form of outsourcing.

The bureau-based model has evolved and manifested itself in various forms including IT facilities management, ISPs, Web hosting, ASPs, and disaster recovery services to name a few, but still forms the basis of a huge chunk of IT services revenue today.

When most people talk about outsourcing they think of full outsourcing. This concept was developed in the 90s, when the first of the major outsourcing deals was announced. These included General Motors and Kodak, which outsourced their entire IT operations including data centre, staff, building, networks and all systems in exchange for a cash injection, and fixed price to large-scale organisations which we now call outsourcers.

Full outsourcing has a bad reputation

The IT industry owes a lot to the concept of outsourcing in its broadest sense, but for the last 15 years or so it has stirred the emotions of IT people fairly consistently.

Outsourcing . . . the mere word today conjures images of the lock-stock-and-barrel surgical removal of an organisation's total IT capability and its grafting onto an ever-expanding monolithic outsourcer or external service provider (ESP). Stories of massive failures, careers terminated, staff placed in poorly thought out and executed transitions are rife in the industry. Many of these stories are true. Many are not. In reality, the original objectives in many of the arrangements were unclear, resulting in failure to execute appropriately, and hence the perception of failure.

Gartner's recent survey of Australian CIOs paints a more positive picture of outsourcing, with more than 65 per cent of CIOs registering their satisfaction with outsourcing deals. That's pretty high for something that has been so maligned. Nevertheless, outsourcing still bears the scars of a bad reputation created by first-generation outsourcing deals, with rigid service levels, contracts and pricing mechanisms, and insufficient flexibility regarding technology upgrade and refresh.

The Second Generation - the future of outsourcing

Today Gartner is seeing a resurgence in interest in outsourcing in Australia.

The second generation of outsourcing deals that have hit the market in the last 12 months are gaining credibility and acceptance as the way of the future. One of the key differences between the first generation of outsourcing and the second generation is that in a second generation deal, outsourcing is an integral component of an entire sourcing strategy, developed by the entire enterprise, and not just the IT department.

The model for outsourcing is changing dramatically. Although the big, total outsourcing deals will still occur, they will be few and far between. The most dominant model in Australia will be that of selective outsourcing or 'multisourcing'.

Multisourcing blends a raft of services from multiple ESPs and internal IT resources. Some of these services may have been outsourced in the past, but have been brought in-house. Some services may be provided internally. Some may take advantage of offshore applications development capabilities or selectively use a number of local service providers for infrastructure and network services.

Second generation outsourcing arrangements by their nature, will be much more successful. Technologies have changed, the service provider space is increasingly more competitive, contracts are more flexible in structure and payment methods, and negotiators are more savvy due to lessons learnt and more tools exist to manage contracts. Contracts themselves are becoming shorter and will continue to become shorter. Renewal options and service level variations are becoming more flexible. Provisions for future insourcing of certain services are also being built in.

Service providers and users must work harder in second-generation deals

Spurred on by the success of second-generation deals, the outsourcing market will continue to evolve. As customer's IT and business strategies become more closely aligned, the decision to outsource has changed from strictly tactical and cost-based to one based on obtaining strategic business value.

Although efficient IT operations continue to be a vital component of many outsourcing engagements, increasingly sophisticated enterprises are demanding new value in the outsourcing relationship.

Service providers that are successful in responding to this demand, and IT user organisations that put the required effort into the creation and ongoing management of an enterprise-wide sourcing strategy will benefit the most from these second-generation deals.

Craig Baty is group VP, Gartner Research

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