Outsourcing is not simply an economic panacea. How will core
business be affected?
IT has embraced outsourcing in an all-or-nothing fashion, whereby
work currently performed in-house is moved to third-party facility
management (FM) companies. However, I wonder whether there is an
adequate understanding of the economics and implications of
outsourcing, and the differences between development and supplier
management.
I believe that no company can afford to outsource its core
business activities, which provide the opportunities for profit.
For example, life insurance has core activities that include fund
management, the generation and processing of new business, and the
administration over many years of the business attracted.
Fund management delivers profit through the skills of company
investors. New business and administration contribute through the
relative efficiencies of these processes vis-…-vis competitors. IT
contributes significantly to both of these.
Outsourcing has economic attractions because FM companies
attract similar business from a number of clients, treating their
work identically, and benefiting from economies of scale. This
leads to savings for the client, but at the expense of a loss of
competitive edge over rivals.
Companies cannot afford for this to happen with core activities,
which contribute to the position and perception of the company
within its market. The standardisation of processing that
outsourcing engenders would constrain product and service
development if core activity is outsourced.
A further concern is that an outsourcing decision might indicate
a lack of appreciation of in-house skills, and that this will lead
to a reduction in IT service quality after outsourcing.
IT staff are sometimes viewed solely in IT terms. In practice,
many have significant experience with their company and their IT
skills are supplemented by specific knowledge of products and
services which the IT systems support. A properly managed in-house
IT department should have an advantage over external companies
because of this knowledge and the value it can bring to the
business.
In the medium- to long-term, companies should not count on high
levels of client-specific knowledge being present within an FM
company. The relationship between the business and IT, in its
outsourced form, must change particularly in areas of planning and
specification. Flexibility and business response times will
inevitably be affected.
The question of whether the outsourced IT facility will be
capable of adequately supporting the business must be examined.
Will the company as a whole be as capable of changing and reacting
as it was before?
Outsourcing can be a solution for handling non-core, routine
activities. But, if core business is outsourced and adequate
experience at managing external suppliers does not exist, there may
be problems due to a loss of control and responsiveness.
In the aftermath of the Hatfield train crash, it will be
interesting to see if the apparent decline of Britain's railways
under Railtrack's stewardship is in any way due to the management
of outsourced core activities, and whether any of the above might
have applied.
David Moore is principal consultant with LNW
Consultancy
www.lnw-consultancy.com