The outsourcing value proposition

Reducing operational cost is the primary driver of outsourcing, but what value are companies really getting from the deal?

Market intelligence research concludes that pressure to deliver strategic IT projects is fuelling a growing internal resource and skills shortage. To bridge that skills gap, businesses in 2006 are turning to outsourcing.

A recent study by PMP Research revealed that 47 per cent of companies plan to outsource their desktop systems this year. However, the decision to outsource cannot be taken lightly, especially when another survey, this time commissioned by Computacenter, the European IT services provider, identified that 65 per cent of private sector IT directors are working with multiple outsourcers simultaneously, making effective management a priority.

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Further to all these statistics, research from Orbys Consulting alarmingly suggests that blue-chip companies are still entering the outsource selection process without knowing exactly what they want or how to best source it. As a result, 23 per cent of outsourcing contracts are being brought back in-house, and 59 per cent of contracts need renegotiating.

So what's gone wrong? Graham Underwood, operations director at GFT would argue that this is because companies aren't paying attention to the 4Ps. "First consider the nature and complexity of the project, then assess the type of people the project will need over its lifetime. Thus the answers to the first two Ps will determine the outcomes of the second set; price and place. When all the, often hidden, costs have been considered a decision can be made about where to send the work."

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Rather than a component of the decision, place is, in reality, the output of the equation. Stephen Dunn, UK managing director of sourcing advisors Everest Group goes even further, laying the blame for outsource underperformance on the corporate doormat, insisting it usually comes down to a combination of defective strategy, poor planning, wrong suppliers and weak execution and governance. "Too many outsourcers assume they have bought a limitless resource and immediately proceed to strain the capacity of their outsourced service. To avoid quality and cost over runs, buyers need to carefully manage the demands they place upon their outsourcers and take full responsibility for their utilisation levels."

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Backshoring: the next big thing Mike Fields, chief executive at customer service specialists KANA warns that because cost savings are not being realised this is leading to an increase in 'backshoring'- bringing offshore functions back in-house. "Outsourcing was built on the promise of low-cost labour, but for the high tech sector companies are realising it is not the panacea it was made out to be" he maintains.

If you look at the total end-to-end costs of outsourcing, many companies are discovering it actually costs more than handling the entire process in-house. "Off-shoring involves considerable overhead in terms of programme costs, travel costs, and project oversight involved in managing geographically dispersed teams." Which is why Jon Fuller, operations director at Centrix advises that outsourcing should be approached on a smaller 'project-at-a-time' basis, with each completed before the next begins. "If problems do arise, it is more likely that they will be confined to one or a few smaller projects so the issue and subsequent resolution can be identified more rapidly."

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The problem with this model being that it may not deliver the significant step-reduction in cost that companies expect from outsourcing. 'However, it will build a more robust basis for a long term outsourcing strategy for consistent cost reduction with consistent service levels."

Can you outsource a mess? You'd be forgiven for thinking that nobody could argue with Stephen Turner, a business consultant at asset management company Stratic when he says that benchmarking the cost and performance of your existing IT services is a critical first step for any company trying to decide whether outsourcing makes good business sense. "Don't outsource a mess, you'll just end up with an outsourced mess!" says Turner.

Nonsense says Nick Andrews, European managing director at strategic outsource advisors EquaTerra: "Some people say you can't outsource a mess, this is a common misconception. Often the discipline of outsourcing allows organisations to cut through Gordian Knot type problems and achieve bold business goals." What you can't outsource is something you don't understand, and that's a different matter altogether. Of course, everyone agrees that outsourcing is best for business only if from the very start you have your eyes wide open, and your mind too.

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Summary We'll leave the subject with the sage words of John Leigh, head of outsource marketing at BT Global Services who says: "As with all relationships, outsourcing isn't about perfection. People are looking for improvement, not Nirvana."

That is just about the best advice you could take on board if you want to avoid doing the outsourcing hokey-cokey where you put your sourcing out, bring it back in, shake your business processes all about...

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