Outsourcing is not simply about farming out all your IT to the
cheapest suppliers - why assume that suppliers can run a business
more efficiently than you can with your own staff?
A firm can outsource any type of business
process
IT assets and activities can take many different forms, but they
can be categorised into critical differentiators, critical
commodities or useful commodities.
A critical differentiator, such as the British Airways' reservation
system, should be kept in-house. External resources should only be
bought in when necessary and controlled by management.
A critical commodity, such as an aircraft maintenance system, gives
an airline no competitive advantage but it is a minimum requirement
to compete in the airline sector. These systems can be outsourced
where supplier price and quality of performance compare favourably
with the in-house option.
Useful commodities, such as datacentres or the payroll, are the
most obvious targets for outsourcing.
Outsourcing is always the cheapest
option
We once witnessed an unsolicited bid to a food and drinks
conglomerate anxious to outsource its datacentres.
The suppliers' representative claimed his firm could maintain
service levels and achieve 20% savings on a five-year contract, and
said that a 10-year contract could achieve 30% cost savings. The
claim was based on production and labour economies of scale,
together with what was claimed as superior management practices
inherent to a world-class IT supplier.
A three-hour look at the claim against the existing IT performance
of the company revealed that it was large enough to achieve similar
economies of scale itself, and that its IT management was actually
very experienced.
Single-supplier, long-term deals are
economical
The record on these sorts of deals has been very mixed. Lacity and
Willcocks (2001) looked at 29 such deals and found that 38% met
expectations, 35% were unsuccessful and 27% got mixed results.
Deals such as this were made in the early 1990s - often by firms in
financial trouble - and typically made to reduce costs.
Suppliers made a large initial outlays to buy users' assets and
take over much of the IT headcount. The suppliers needed to recoup
this investment and, as a result, sometimes user organisations felt
exploited.
Outsourced suppliers can provide a better
deal
Organisations usually outsource IT for a mixture of strategic,
financial, political, technical and tactical reasons. However,
evidence has suggested that cost savings are one of the most
important expectations.
There is plenty of evidence that cost savings can be achieved, but
there are limits as to the extent to which a supplier can achieve
the "holy IT outsourcing trinity" - dramatic cost savings, a decent
profit margin and higher service levels. There will be trade-offs:
eg, cost savings might be achieved at the expense of degraded
service levels, or a lack of technology investment.
Always take the cheapest quote for
outsourcing
A natural instinct is to make sure you have a watertight contract.
However, slim or no profit margins can drive a supplier to
opportunistic behaviour, can harm your relationship with them and,
ultimately, the business value of your IT performance.
Intelligent IT Outsourcing: Eight Building
Blocks to Success, by Sara Cullen and Leslie Willocks, is part of
the Computer Weekly professional series. To order, call
01865-888180
www.bh.com/computerweekly