In the early 1990s outsourcing usually meant facilities management,
but firms today are increasingly looking to third-party suppliers
to provide them with what has been called "strategic sourcing",
writes Ross Bentley.
The term implies that contracts are driven not just by the need to
cut costs but also by the desire to create value. This is one
reason why the scale and duration of outsourcing contracts has
increased.
As IBM's vice-president of strategic sourcing for Northern Europe,
Bill Kelleher has overseen some of the biggest deals signed in
recent years. "Today we are talking about deals worth billions of
pounds," he says. "In the first quarter of 2002 IBM Global Services
has signed contracts totalling about $15bn [£10m]. This is a record
and two-thirds of this has involved strategic sourcing
agreements."
IBM has billion-pound deals with American Express, BT/Cellnet and
Invensys. Kelleher says more companies are using strategic sourcing
to drive business and organisational transformation, which has
entailed the development of consulting services.
"While straightforward datacentre and legacy outsourcing is still
critical to our growth, customers are now using us to spearhead
projects such as consolidating datacentres, reshaping processes and
Web-enabling customer-facing applications," he says.
But in the current economic climate these decisions are not taken
lightly. Companies must be tough and there is an extra layer of
rigour involved in making these decisions. But at the same they are
preparing to be the first off the blocks when things pick up, says
Kelleher.
He has seen increasing confidence in outsourcing, with firms
putting out critical parts of their IT to trusted partners.
"There are a lot more global operations going on. The greater the
scope, the more in the deal but also the greater potential saving
and ability to delivery a better end result," he says.
Kelleher has also noted the emergence, albeit it gradually, of an
increased use of e-sourcing - the outsourcing of individual
business processes such as human resources, supply-chain management
and procurement, or "pay-as-you-go e-business on demand".
Application service providers were the precursors of this but, with
a few exceptions, did not take off. "They failed because the
economics did not work. We now realise that you need to price the
deals over the lifecycle of the project."
With one-third of companies that have Web sites using a hosting
company, Kelleher says it is only a short step for firms to
consider applications on demand. "Average hosting contracts range
from two to three years in length. I expect applications-on-demand
contracts will take the same model," he says. "So we will see
large, long-term outsourcing deals running alongside pay-as-you-go
arrangements of a much shorter duration.
"Businesses change very quickly these days and they have to bear
this in mind whenever they enter any contract negotiations. You
have to build a contract that allows flexibility. It is essential
to build service level agreements (SLAs) into any agreement. You
have to tie SLAs to benchmarking standards. These will change from
year to year so this is reflected in the contract."
And as the outsourcing sector has matured contracts have become
more sophisticated. Companies are increasingly willing to consider
risk-and-reward arrangements says Kelleher.
"The opportunity for risk-and-reward clauses depends on the
situation and the type of contract but is something we are seeing
more of," he says. "That is both IBM and its partners being willing
to risk a level of profit and revenue. The level of risk and reward
should be equal on both sides and should be tied to a direct
benefit to the customer."
This works in long-term relationships where an element of risk
exists. "It all comes down to a question of trust, and trust is all
about people - people saying they will do something and delivering
on that," says Kelleher.
Bill Kelleher, vice-president of strategic sourcing for Northern
Europe, IBM
ross.bentley@rbi.co.uk