Whether to outsource or not is shaping up to be one of the big questions of the year, both for prospective buyers of outsourced IT solutions – including managed services - and for service providers hoping to supply them.

According to Gartner Group, the market for outsourced services will grow strongly over the next few years, influenced heavily by the trend towards the “net-liberated organisation”. They predict that a clear 40% of Europe’s IT and business process spend will go on such services by 2005. Further, they expect this spend to increase over the next few years at over 14% per annum.

Whether you believe these figures or reckon it’s just more analyst hype, one thing is now certainly true. Like the financial markets, users have well and truly overcome the urge to buy new technology-related services just because it’s trendy. The reasons for buying in the current climate are much more down to earth and dependent on individual circumstances.

Why bother with it?

For prospective buyers, the most frequent reason stated for outsourcing in any form has always been to reduce operating costs. The other is often a desire to focus the organisation on more important activities – its core activities that define the business the organisation is in and how it competes in the marketplace. There are of course many other reasons, but these two are the most frequently stated.

So what’s the actual value in outsourcing?

In all cases, it comes directly as a result of the expertise and prior investment of the outsource provider. Reduced cost, for example, comes from the resources that the outsource provider has that the buyer can take advantage of for less cost than if he were to use his own in-house resources. The ability to increase focus on the business comes mainly from the expertise of the provider, not because he is smarter but because he has greater experience and knowledge in dealing with that particular element of the business. It is his core business so he can be expected to be keeping up to date with the latest technology developments and how best to use them for the advantage of his clients. That’s the theory, anyway, yet often the ramifications of these important points get overlooked in the rush to market.

Certainly, these benefits have never been more desirable than now. For many companies, the current economic situation has led to major cost cutting just when extra effort is required to develop the business.  For all companies, though, there is an increasing need to concentrate on new ways to differentiate their products and services in their own market and focus key resources on the core activities of their business. The pace of business change is increasing relentlessly. As a result, most companies can no longer afford to spend freely and keep all of their business processes in-house.

Going Selective

In recent years, there have been a lot of user concerns regarding the principle of outsourcing. As a result, full outsourcing is becoming much less common and selective outsourcing – increasingly similar to managed services - much more the norm. The main reasons usually given for this have been the lack of savings and flexibility offered in practice by full outsourcing. Few total outsourcing providers actually have the capability to handle all facets of the operation, so it inevitably leads to higher costs and reduced flexibility as they themselves subcontract elements of the outsource operation. However there are also other major concerns, most notably to do with loss of control. Also, everything to do with security - for example the desire to keep valuable corporate information safe and the need to retain maximum confidentiality. The desire to retain a level of in-house skills closely associated with the business is also high on list.

Selective outsourcing, so-called smart sourcing or managed services are an effective solution to address these concerns, as it allows an organisation to gauge the value of the strategy without committing the whole of its IT capability into the hands of a third party. Further, it allows a balance to be drawn between external expertise in the technology with internal skills and understanding of the needs of the business. Not only that, this balance can be adjusted over time depending on circumstances arising and can therefore be highly flexible.

It also clearly fits very well with Web-based services, particularly for trading with business partners as per the “net-liberated organisation”. Using such networks to deliver selective outsourcing is a natural match.

Not convinced?

Research shows that, for all the potential benefits, there are four main reasons for turning down outsource propositions:

1. Too risky. Essentially, this boils down to concerns about security or the fear of losing control of business critical processes.  

2. Service provider not trusted to deliver. This is partly an extension of the first reason. Although the principle of outsourcing may be accepted, the service provider is not considered to be up to the challenge of delivering consistently over time. Part of this may be due to the perceived financial position of the service provider – will he be around in the future? Another may be due to previous experience of “loose” Service Level Agreements (SLAs) not delivering. 

3. Cost not justified.

4. Too disruptive to operations to consider right now – maybe later. 

A further, less common reason is that the processes proposed for outsource are considered too specialised to be satisfactorily covered by an external service provider.

Apart from the basic suitability of the proposition and the service provider for the task required, the main difficulty behind all of these is that the case for outsourcing has often simply not been compelling enough. Although the situation may indeed merit outsourcing, the actual case for it has been poorly made.

What’s the value - for me?

In the current economic climate, users are increasingly needing to prepare well-founded business cases for introducing outsourced IT solutions and managed services into their organisations. The stories of expensive IT projects not achieving any clear benefit have heightened concerns.

Service providers can help with this, but all too often do not. Although a cost-benefit analysis may be provided, the way this is presented is usually simplistic, often based on questionable assumptions (or guesswork) and even more questionable comparisons. It is also usually far from complete. As a result, it may be interesting to users in passing but is seldom credible enough to be of much use to them.

Our own ongoing work in this area (see CostBenefit Analysis) indicates that, for an analysis to be compelling and credible, it must be comprehensive, objective and relevant. This means that the analysis itself must be carefully planned and based on properly researched data. What is the solution really worth to the user? What proof is available to demonstrate that claimed savings will be made? Is it relevant for a particular user’s circumstances? Only adequate research of real cases can answer these questions, yet all too often this is not undertaken.

Further, these services increasingly offer additional benefits that are difficult or impossible to quantify. Nevertheless, these must also be accounted for as they may represent considerably more value than the straight financial numbers suggest on their own.  

Ascribing real values to outsourcing is becoming increasingly necessary and worthwhile. However, the methods currently used often fall well short of being useful.

 © e-principles 2002

Robin Duke-Woolley

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