Future of outsourcing depends on trust

In the early 1990s outsourcing usually meant facilities management, but firms today are increasingly looking to third-party...

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

[email protected]

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