Outsourcing — the pendulum swings

Is every outsourcing agreement a success?

Hang on, perhaps that should read, is there ever an outsourcing agreement that’s a success.

Certainly, highly-publicised events over recent years, particularly in the public sector, have cast a pall of doubt over outsourcing’s effectiveness, not only in terms of cost blowouts but also in management and performance.

But for every disaster, there is a raft of successes, according to Merv Langby, chief services analyst with industry analysts IDC.

“Any stories that have been promoted as disasters by the media, it has been very easy to point out that they are picking on organisations [clients] that are not universally agreed as sophisticated organisations,” he said.

And the well reported, if not notorious, “whole-of-government” situation? “What impact or influence has the federal government had on the outsourcing market in the private sector? The answer has been absolutely SFA. Name me one private sector organisation that gives a stuff about what any government department has done about outsourcing.

“Private industry doesn’t have a very high opinion of government entities as business enterprises.”

Langby believes that outsourcing has undergone a basic philosophical transition over the last decade, towards strategic “win-win” partnerships between client and outsourcer. But it was not always so.

Apart from a few prime and highly visible examples of “sophisticated” outsourcing, “like any somewhat immature marketplace the initial approach was rather simplistic and even crude; the objective was not the best one to fix the IT problem, to fix the asset, and to get some productivity and efficiency. There wasn’t too much astute thinking about what to keep in-house and what to outsource. I use the phrase, ‘Let’s just dump the entire data centre’ and that really meant everything.

“What has evolved is that the majority, almost universally, have subsequently said ‘If we had our ‘druthers again, we would have devoted more time to analysing what was involved in the outsourcing decisions and we would certainly have retained certain functions’. Those functions might obviously be things like strategy, applications development, applications management, perhaps half a handful of key individuals like a solutions architect, a networking specialist, etc, knowledge management or business intelligence style of individuals,” Langby said.

Barry Pipella, VP strategic sales for IBM GSA, agrees that things have improved. “Customers now have well-managed internal processes. They are no longer outsourcing a problem.”

Increasingly, Langby says, organisations have looked to strategic partnerships that are based around KPIs (key profit indicators), rather than earlier situations of tactical service provider arrangements based on SLAs (service level agreements). So much so, Langby says, that in the US 14 per cent of organisations are looking at a joint relationship where the outsourcer has a stake or equity in the client business.

Pipella, however, finds that the frequency of this latter sort of relationship — outside of joint ventures where each party brings assets to the job — is lessening.

“Outsourcing was never meant for life,” he asserts, adding that all parties need to recognise the need to be flexible, and that includes the life of the relationship.

Changed conditions

However, current market conditions and the constrained economic situation have brought the emphasis back onto price — “cost cuttings rather than being concerned about higher levels of the cost equation such as predictability and global competitiveness”, as Langby says. And indeed, organisations in the contract renewal process are looking at higher levels of cost savings and much more stringent SLAs.

“They’re looking for more control. Rather than going for full IT outsourcing, they will look very selectively at a portion of their IT activity and then contract on that selective discrete basis, and that could be at the desktop, or the network, the helpdesk — primarily applications support rather than applications management.” This attitude to outsourcing has always shifted in emphasis, swinging back and forth as the market moods shift:

- Whether to go the outsource route at all
- Whether to look at a tactical (service provider) or strategic (partner) approach
- Whether to outsource routine activities or more complex operations
- Whether to outsource support or management
- Whether to go for lower costs or greater growth

The title of a presentation Langby gave to IDC’s recent Directions 2003 conference sums up the contradictory attitudes: Outsourcing: Passe, Limbo or Future Catalyst for Business Transformation?

“Good intent [re IT investment] is being held back by the uncertain conditions around the economic and market conditions — what we refer to as the delay in the demand.”

Pipella says the prime motivator for outsourcing is access to talent (only large organisations can afford in-house specialists), followed by reduction in costs, focus on core competencies, and value creation.

As Langby puts it: “While looking at the longer-term strategic process, don’t take your eye off the ball. Because that’s the responsiveness bit — the ability to respond. If you haven’t got that, that’s where your partner comes in.”

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