What is outsourcing?
It is not a new or alien phenomenon. Almost every organization outsources some aspect of its business. A paint company may outsource the manufacture of its paint cans; a mobile network may outsource its billing activity; a hospital may outsource medical waste disposal; an auto manufacturer may outsource servicing; and an IT company may outsource its janitorial services. Outsourcing is really about letting experts do what they do best, leaving the business to focus on its core strengths. This means that paint companies, mobile companies, hotels, auto manufacturers and others would do well to consider outsourcing their peripheral requirements while they focus on their core strategy. The most popular forms of outsourcing are information technology outsourcing (ITO) and business process outsourcing (BPO).
The advantage of both is fairly clear. Outsourcing can improve the quality of service since experts provide it using specialized tools, facilities and talent. Organizations that outsource their IT requirements don’t have to spend on recruitment, training and retention of the talent that may not necessarily see a robust future in a non-technology company. As an added benefit, outsourcers find that it enables them to stay nimble. IT outsourcing is about acquiring high-quality services that are predictable and reliable at costs that won’t break the bank.
However, the salient feature of ITO and BPO is the access to service innovation. Service providers have the time, talent, industry understanding and investments to explore innovations. Outsourcers have the luxury to leverage those innovations.
Practically every aspect of IT can be outsourced — from the humble and low-tech IT helpdesk to cutting edge technology R&D. Product design, architecture, coding, testing, integration, localization, support, maintenance and end-of-life functions can be outsourced.
Measures for effective outsourcing
Outsourcing IT is not quite as simple as it sounds. There are five steps to effective outsourcing — an organization should:
- Consider what to outsource and the expected returns from the outsourcing
- Create an outsourcing strategy that addresses safe and manageable steps to ensure effective outsourcing without affecting business continuity
- Create a strategy for outsourcing that protects IP
- Decide on an appropriate outsourcing partner
- Develop appropriate contracts that allow flexibility, define SLAs and management and governance practices
However, success in outsourcing does not depend on the above five steps alone. Project management skills and leadership support are the foundation on which great outsourcing practices are built. But success comes from organizational and cultural alignment between the outsourcer and service provider and from effective communication between the two.
The future of outsourcing
IT outsourcing as a business is not about to shrink. If anything, the market for IT outsourcing will continue to grow, even as what gets outsourced keeps changing. The logic is simple — businesses like those of Walmart and Nike, Citibank and KFC will not want to turn into IT hotbeds. They will want to continue to focus on their core business such as retail, sporting goods and apparel, banking and fast food and let their IT partners largely provide the IT infrastructure and services.
However, outsourcing is not what it was in 2000. Today, the mega deals have vanished. While the average deal value in 2000 was $360 million, today it is a third of that. While the number of mega deals and mid-range contracts has more or less continued to remain at the levels of 2002, deals valued at $100 million or less have grown three times.
There are two reasons for this trend. First, smaller companies are getting a handle on outsourcing processes and are leveraging the cost benefits. Second, large companies are breaking down their outsourcing requirements and farming them out to different providers in a bid to minimize risk and increase savings. The downside in a multi-provider model is increased governance focus, but the trade-off in terms of bottom line gain is worth the effort.
The global recession has increased the quantum of outsourcing as a response to short-term cost pressure. Providers have also had to innovate to bring down costs and provide better pricing models. This has given way to flexible pricing, outcome-based pricing and revenue sharing models.
The biggest gain for outsourcers has been the emergence of an increasing number of standardized solutions from IT infrastructure, consulting and service providers so that differentiation is clearly visible in performance and price. This has given rise in turn to shared services that not only reduce prices because of higher efficiencies but also deliver better quality of service.
Considering the dramatic changes forced by recession, the future of outsourcing looks much more robust than ever before. Yes, deal sizes are a matter of concern. But the number of businesses that can leverage outsourcing is bound to go north.