Outsourcing the Enterprise

Anyone setting up a new business these days would have to think very seriously before creating an internal IS department.

Anyone setting up a new business these days would have to think very seriously before creating an internal IS department.

For small and medium sized businesses, there are now a huge range of services available - from the new breed of ASPs (Application Services Providers) to traditional outsourcing companies, and various shades in between - that take away the day-to-day responsibility of IT and allow you to concentrate on your core business.

For companies supporting enterprise data centres, though, the outsourcing question is very complicated indeed. It's all very well for industry visionaries to wax lyrical about moving towards a utility industry with 'IT on tap', but any major infrastructural change has numerous technical and financial implications. The fact is...

that internally managed glass houses are becoming more efficient all the time, partly because we learnt to stand up and compete with outsourcing service providers during the 1990s, and, partly because large systems hardware and (to some extent) software have been driven way down in price. This means that, despite the usual economies of scale, it's getting harder to make a cost case for outsourcing in the large organisation.

As KPMG's Dave Claridge puts it in 'The true cost of outsourcing' ('Controlling IT Costs' report, www.xephon.com/clrz.html):

'Our experience shows that companies who decide to outsource for cost savings will typically be looking to achieve savings of 25 per cent to 30 per cent of the existing costs per annum to make the risk of outsourcing worthwhile. This means that outsourcing decisions based on cost savings alone must carefully take account of the true costs of outsourcing versus insourcing.'

He goes on to list nine costs that are commonly hidden from view in an outsourcing contract. This note of caution is borne out by Xephon's latest IBEX survey, in which we asked 90 large systems users for their views on outsourcing. Around five eighths of the respondents either had some interest in outsourcing, or were already farming out some of their IT activity. The most commonly cited drawback of outsourcing, mentioned by a third of those who had looked into it, was 'hidden costs', closely following by 'loss of control of strategic systems'. And when we looked at the perceived benefits of outsourcing, few respondents believed it would bring cost savings: most cited the availability of skills not found in-house, and the advantage of allowing internal staff to focus on strategic projects.

Despite these concerns, there was a generally positive attitude towards external IT services in our research; over half of the installations that were actively involved in outsourcing expected to see an increase in the proportion of IT spend being paid to external services companies over the next two years. The question is, what is driving this trend in the large enterprise, if it isn't cost savings?

Well, the short answer seems to be, skills. The focus of enterprise computing has changed so fundamentally in recent years, with e-commerce and Web interfaces shaping the vast majority of new applications, that a large number of data centres are turning to external bodies to provide the new development skills they need. Ten years ago outsourcing was about 'core versus chore', with the services companies mopping up the unglamorous maintenance and support work, leaving the strategic projects in-house.

Today the picture is much more mixed; our research shows that web management and new application work (including packaged applications in such areas as Enterprise Resource Planning and Customer Relationship Management) account for much of the growth in enterprise outsourcing investment. Server and processor management are also moving steadily into third-party hands.

More resilient to the lure of outsourcing, however, are systems and data management. The corporate database, in particular, remains resolutely in-house in most cases. This in itself is intriguing; it suggests that, while simple processing is becoming increasingly commoditised, companies see data (particularly customer information, of course) as the real commercial differentiator, the asset that must be internally managed, protected, and leveraged.

This all suggests a clear evolution in the enterprise landscape, with infrastructural data-focused areas remaining in-house, new development and web management growing up as a separate external activity, and IT interfacing closely (in the technical and organisational sense) with external pools of e-expertise. This may still leave us some way from the ideal of 'IT on tap', but it maybe suggests a more logical division of responsibility between internal and external teams.

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