It could easily be interpreted that IT outsourcing is all about cutting costs. If at the outset outsourcing something cost more than doing it in-house it would be a non-starter. Some outsourcing does end up costing more than in-house and this is usually a reason for a contract to be cancelled.
But have IT service providers now matured and become experts in certain sectors? I recently spoke to Nasscom chairman KK and he told me that Indian companies have built up expertise with customers and are now better at doing certain processes than the customers. He said they have become experts in different field over the years.
In this guest blog David Mackay, senior director of Diversified Business, Europe at IT consultancy Virtusa’s, gives us his take on the real advantages of IT outsourcing today.
The real benefits of IT Outsourcing and how to achieve them
By David Mackay,
“IT Outsourcing and especially offshoring was originally conceived as way to save cost through the labour arbitrage offered by low cost economies such as India. Fast forward to today, those low cost geographies have seen costs increase, while at the same time ITO suppliers have built up real capability and expertise. The calibre and maturity of staff working for ITOs has increased, while the extensive experiences those ITOs have, coupled with their evolution of highly sophisticated delivery management processes has resulted in organisations that are more competent than many of their customers. So as either a new entrant into the IT Outsourcing space, or as business that already uses IT Outsourcing, what are the key benefits available?
As noted above, ITOs have built up extremely strong competencies through their experience of multiple client engagements, programmes and projects. So within ITOs there are experts who really understand domain and technology. Customers should be leveraging that expertise, using the ITO as a way to focus a wide range of capability to address the task at hand. Rather than the business trying to design the solution and have the ITO build it, smart customers are articulating the business requirements and expecting the ITO to come up with the right solution. This access to expertise especially around solution design is a key benefit of ITO, and being able to leverage it is essential to derive maximum value from the ITO arrangement.
CEOs are being asked by their boards to innovate, and to look both internally and externally to generate and harness innovation. Business should look to their ITO supplier as a key source of innovation. For the reasons above, ITOs have the ability to apply latest thinking from emerging industry trends. While many customers may expect to see innovation, many ITO suppliers will not provide it by default. It is incumbent on the customer to set their expectations clearly with regard to supplier innovation, at the outset of the engagement. Suppliers often create innovation through the work they do for clients, but don’t expose it. Often really innovative steps are taken by junior team members working miles away from the client, and without any client facing time. While many ITOs have systems internally to harvest innovation, customers must establish the framework, opportunity and incentives for ITOs to promulgate innovation.
But probably the key benefit of ITO is around the achievement or acceleration of desired business outcomes. While suppliers have the expertise to deliver technically sound solutions, those solutions will address the requirements outlined to them, which have often passed through intermediaries, so that what the business really wants isn’t what the ITO is asked to build. The easiest way to access this benefit is to structure the entire relationship between ITO supplier and customer through a contract that is outcome based. While many people talk about this, it is hard to do. The reason being that in order to achieve a business outcome, that outcome must be structured in such a way that it is measureable, so that the ITO has a clear target/metric to achieve. Being able to define these metrics appropriately requires some skill, and is predicated on the various stakeholders within the business having a common vision of those outcomes.”