Companies that use outsourcing in a limited fashion and see it as a strategic decision perform better in the long term than companies who use outsourcing indiscriminately to cut costs or get rid of IT problems. This was the finding of aninternational study by a group of US and Australian academics.
The study, entitled Core Competencies and IT Outsourcing: A Test of the Strategic Asset Focus Model, by Detmar Straub, Peter Weill and Kathy Stewart, also found thatcompanies that view IT as a strategic asset and invest in strategic IT that supports the improvement or introduction of products or customer services tend to outsource less.
More worrying for the IT director is evidence that a bandwagon is created whenever a leading company announces a major outsourcing deal, with managers in other businesses tempted to follow suit somewhat haphazardly.
So, how can bosses prevent their company becoming a fashion victim and persuade it to keep IT in house? David Ingham, a consultant in the managed services division of IT services company CMG, suggests a first step is for IT directors to sit down and do some simple maths to help their boards understand whether outsourcing will really help solve their problem.
"You need to find out whether your company can derive the right amount of economic benefit and whether your outsourcing partner will be able to make the right economic return," Ingham explains. "Typically, outsourcers will be looking for margins of 20-25% for contracts to be sustainable and there are also the costs of transition. Unless the supplier can deliver the service for half your organisation's existing cost structure, it won't be possible for them to sustain the contract over a long period of time."
However, Ingham points out that IT chiefs must accept that demands by board-level directors to outsource sometimes have nothing to do with the effectiveness of the IT services they are delivering.
"Heads of IT are often at a lower functional level than the board and are concerned with issues such as efficiencies or staff happiness. The board may be more interested in getting costs or revenues per employee to change radically, in order to make city analysts look at them differently - and they know they can achieve that through outsourcing," he says. In short, you could be doing a really good job at delivering IT services to the company and still get outsourced.
Ingham suggests the IT director can fight back by making the board aware that the IT function does contain strategic assets - the infrastructure and the information contained within it.
Simon Young, who heads up the UK operations of IT management tools supplier MainControl, thinks IT directors struggle to get this message across because they cannot articulate the value they are delivering in terms the business will understand and are unable to demonstrate that they are making good decisions about the assets and budgets they are managing. "For example, IT directors need to explain the return on investment, the costs of different activities and what the alternatives to the current strategy might be," he argues.
Young suggests that IT directors often don't have the answers to these questions because they don't see that they should be running their departments as businesses in their own right. "That's what the outsourcers are doing," he points out. "They know how much it costs to perform a certain task, such as delivering a PC to a particular location in a particular time frame - and what the profit is. If IT directors aren't getting the full support of the board, it may be because they're not providing the same level of information to the board."
Young argues that what companies need is a form of enterprise resource planning (ERP) system for the IT department. This has been christened Infrastructure Resource Planning (IRP) or Technology Infrastructure Management (Tim) and is essentially a more mature approach to asset management.
The aim is to provide control across the complete IT lifecycle, from introducing and deploying IT assets to using, managing and eventually disposing of them. "It's business intelligence for the IT director, helping you know how much you're spending, what you're spending it on, how you're performing against your plans and whether you're meeting your objectives," Young says.
Creating a repository of information about the "IT business" - not just details of physical assets, but also data on contractual obligations and licenses, staff resources, sourcing policies and suppliers - allows IT directors to respond more quickly to business managers who have seen an idea in action elsewhere and want to know if it can be implemented in their own company.
Young explains, "IT directors can quickly say, 'if you want to go over there, the licence implications will be this, the infrastructure development implications are that, because we have these supplier relationships in place, and the total cost will be this'. It will no longer take you several weeks to come up with an answer - by which point, the business may be looking at outsourcing because it knows an external partner is geared up to just come in and take the problem away."
However, having access to the information to make strategic decisions is not enough on its own. You are mainly in danger of outsourcing if you face persistent grumbles from the business about the quality of the service being delivered by the IT department. Alan McCarthy, UK sales and marketing director of infrastructure management specialists Pink Elephant, argues that the IT department needs to meet the business half way if it is to stave off the threat of outsourcing.
To help companies understand what they need to do, Pink Elephant has turned to a six-stage model developed by Bob Galliers, a professor at Warwick Business School, which describes how IT departments "mature" from an "ad hocracy" with a purely technical focus to one that develops "integrated harmonious relationships" with the business and can help the business achieve competitive advantage. Not only do the tasks of the IT team change as the department matures but also the way the business views IT and the way IT views itself change.
McCarthy says a key factor in achieving this maturity is to develop a culture of good internal customer relations. He argues that trust between IT and the business can be built up through the introduction of helpdesk and infrastructure management solutions. Used correctly, these should deliver quick wins in terms of improving customer satisfaction whenever business users come into contact with the IT department. On top of that, staff need to be trained in customer-facing skills such as account management, communication and how to organise and deliver a service-led business.
Ian Leask, managing consultant with Compass Management Consulting, agrees that end-users are often looking for the softer aspects and for the IT department to be "proactive rather than reactive". He points out that numerous automation tools exist which can help IT departments show off that proactive side, by identifying problems that are about to happen. These are exactly the kinds of tools and techniques used by outsourcers, so it is no surprise that Leask is urging in-house IT departments to adopt them.
Driving through these changes is not easy. One of the advantages of using an external supplier is that it is easier to be a more assertive manager and to be tougher about achieving your objectives and applying discipline. It is often difficult for the in-house team to create appropriate relationships with business units for political reasons.
"You may need someone from outside to create the right dynamic, or the business may need someone external in order to believe what IT is already telling it," says John Cooper, European managing director of management consultancy Concours. "It is not just about the IT department marketing itself but also about the organisation's view of where IT sits," he says.
However, Daryl Howe, a director at outsourcing consultancy Quantum Plus, suggests that the perception that IT is expensive or difficult to deliver is not just confined to business managers. "In-house teams are not nearly as aggressive at driving down costs as outsourcers," he says. "Some of that is down to economies of scale but some of it is down to attitude. IT departments are accepting that IT is expensive, whereas outsourcers are getting their hobnailed boots on." So if the business is getting tough with you, you need to get tough with yourselves.
The study, Core Competencies and IT Outsourcing: A Test of the Strategic Asset Focus Model, by Detmar Straub, Peter Weill and Kathy Stewart, is available the website.
Pink Elephant's Pink Report on bridging the gap between IT and business is available by e-mail.