Ten frequently asked questions about outsourcing
Outsourcing IT can save money and reduce the risks associated with buying and supporting IT in-house. It is also a way of accessing the technology skills and experience that can drive business change without having to train staff and take the risks of doing something for the first time.
During the 1990s, outsourcing IT was seen as a way for businesses to remove the fixed costs associated with the day-to-day running of IT business processes. It also became an efficient way for businesses to take up the latest technologies without having to invest up-front in products and training for staff.
Any IT can be outsourced in any part of the business if there are third-party suppliers offering services of a high enough standard. Large corporates, mid-sized enterprises and small companies can all outsource if they find the right supplier and service. SME businesses can use managed services to have a system hosted and managed by a supplier, and large companies can hand the management of a business processes (BPO) to a third party.
Businesses outsource their IT processes as well as more complex functions such as software development and integration services.
But businesses today are outsourcing business critical IT and strategic IT projects. Following the maturity of BPO, businesses have started outsourcing high value-add functions, such as research and development, in what is known as knowledge process outsourcing (KPO).
There are specialist suppliers of outsourcing services within the UK and abroad which all have certain advantages. Businesses can onshore services and take advantage of outsourcing in the UK and benfit from their proximity. Or they can nearshore to take advantage of high-growth centres of outsourcing that offer lower-cost venues relatively close to home.
Then there is offshore outsourcing, an option which has grown significantly over the last few years because it offers highly skilled workers at lower cost.
It is important that businesses ensure that outsourcing is about business enablement and not merely cost cutting. They also need to know exactly what it is that the business needs to succeed they then need to analyse which suppliers match this challenge and find suppliers that really want the business.
It depends on the business case. There is usually a fixed cost for certain services any services not defined in the contract cost extra. There could be extra costs, for example, if the outsourcer is taking risks or funding capital items or refreshes. Many changes from the original service level agreement (SLA) also cost extra.
Businessess can also get involved with gain sharing and pass on extra money when the services enables them to profit.
Businesses using outsourcers need to ensure that the supplier delivers what is expected as well as more, if required. The first step in achieving this is to ensure you have a good contract which stipulates the service requirements. Once the contract is negotiated, businesses must have a governance structure to make sure both parties carry out their respective duties and help adapt the contract if required. There need to be sufficient in-house people to interface with the outsourcer.
Getting more out of outsourcers is the Holy Grail. If services are measured or there are incentives linked to jobs, they will be supplied properly. Businesses often believe that innovation is standard in outsourcing deals, but it is not. The supplier loses revenue through innovations that reduce costs, so, understandably, they are less eager to commit to business innovation if it means less revenue.
Businessess must offer outsourcers bonuses for success and ensure new revenue is added to encourage outsourcers to continuously innovate.
One of the challenges facing IT directors is being able to motivate workers who are managed and paid by the outsourcer. Outsourcer staff will be more effective if they feel part of a team and are rewarded as such. There are ways to motivate staff employed by the outsourcer, such as influencing the supplier when it is deciding its bonuses. Outsourcers can also become more effective if they have competition through what is known as multi-sourcing.
Outsourcing firms can also be motivated through gain sharing where both companies invest and both share the rewards.
Outsourcing agreements will have to be renegotiated at some point. This can be in reaction to changes in the economic environment, mergers and acquisitions, changes in direction for the business or merely because an existing deal has reached its end. Because of the expenses associated with looking for new outsourcing partners, such as retendering and evaluating, many companies prefer to renegotiate with existing outsourcers.
IT departments must change if they are to get the best out of outsourcing contracts. They need a new balance of skills with business engagement experts and contract negotiators essential as well as traditional technology skills to make strategic decisions. It is also improtant to have staff who can monitor outsourcers through analytics to ensure they are paid appropriately.
Outsourcing has not substantially increased yet but will as the economic slowdown continues. But the suppliers have to change their offerings to appeal to businesses with different cionditions in a changed economic climate. This includes suppliers showing commercial transparency, offering early and easy innovation, absorbing risk and displaying their commitment to the deal's success.
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This was first published in September 2008