The ins and outs of outsourcing

"What, when and to whom?" are still the key questions behind any company`s decision to outsource - but a lot more attention needs to be paid to "why?"CIOs should dismiss certain commonly held assumptions about outsourcing, such as that it is trivial or easy, and that it will automatically deliver benefits. In fact, they would do well to completely rethink their approach to it.This is according to the Meta Group, which says feedback received during its Infrastructure and Operations Excellence Conference held in September in San Diego made it clear that many corporations still cling to traditional misconceptions about outsourcing. The research house says even top-rated management executives often feel poorly prepared to make outsourcing decisions, select vendors or ensure they are acting in the best interests of their enterprises.Most delegates at the conference, says Meta, believed outsourcing would reduce costs, while some thought offshore outsourcing would cut costs by more than 40 percent. Only a fifth had thought about the funds that would have to be allocated to the ongoing vendor governance required for successful outsourcing.Meta quite rightly points out that it is misconceptions like this that lead to outsourcing project failures, as these days outsourcing is a "buy versus build" evaluation, and when companies do not understand the true cost of "buying", they tend to make ill-advised decisions. Complicating the entire process is aggressive selling by very large and reputable companies, says the global research house.A somewhat different perspective is offered by another study, released by Accenture in September this year. This claims that companies are outsourcing for the control it gives them over business outcomes, and not just as a cost-cutting measure.According to the results of the survey, which entailed interviews with more than 800 health, manufacturing, retail and travel executives in the US and Europe, 86 percent of respondents said outsourcing gave them more control over business results in a variety of critical areas, the most important being the ability to plan.Although cost-cutting was among these critical areas, the executives also reported equal levels of control in reliability, cost variability improvements, and effective implementation of ideas. More than half said outsourcing enabled them to implement strategies and change at a faster and more controlled rate.As far as the South African scene is concerned, a report released by research house BMI-TechKnowledge (BMI-T) in July shows that the local outsourcing market continues to grow. Revenue related to IT services on total outsourcing projects alone (not including selective or niche outsourcing) is expected to increase at by almost percent compound annual growth rate by 2007, off a revenue base for 2003 sized at R7 billion. What`s growing where?Opinions on where the most growth is taking place appear to depend on which South African vendor you happen to be talking to. Peter Winn, MD at Faritec, which specialises in the provision of mid-range systems and services, says his company finds it easier to meet a client`s niche outsourcing requirements and then cross-sell across its enterprise. He says this way of doing business is far more common these days than large, total outsourcing deals.Ian McLuckie, client delivery executive at services provider EDS Africa, agrees, saying that even the bigger local corporates are moving away from issuing requests for proposals on large, total outsourcing projects. He says they are increasingly opting for an incremental approach, aimed at making sure vendors deliver on requirements on smaller projects before allowing them deeper into their enterprises."The majority of the big outsourcers are now acting as lead service providers or systems integrators or both. Selective outsourcing is definitely on the increase," McLuckie maintains.Desmond Seeley, strategy and business development GM at IT solutions provider T-Systems, believes "the trend will move towards contracting more than one vendor and commodity-based deals. This is because there are so many examples of poor outsourcing where a single vendor was involved that clients have become more hesitant to invest in only one partner. By doing this, the multiple vendors actually keep each other honest." He points out that "This does not necessarily mean that we won`t be seeing any big deals. However, they will be rare."Both arivia.kom`s market development executive, Leon Deist, and its outsourcing GM, Louis Schlebusch, disagree. This IT solutions delivery company handles large, end-to-end information technology outsource agreements, the deployment of turnkey business solutions and the provision of niche solutions. Says Deist: "We don`t see a slowdown in the number of total outsource deals coming through."Schlebusch expands: "The number of requests for information around large outsource deals is going up. In fact, they`ve doubled compared to what was coming through a few years ago. We`re expecting a lot of requests to come in from the public sector as provincial and local government continues to consolidate and outsource its IT systems." `Blamestorming` versus benefitsHowever, few vendors, if any, disagree on what a critical impact the relationship between clients and suppliers has on the outcome of any outsourcing deal, regardless of its scope or price tag. The breakdown of client/vendor relationships around outsourcing projects and the resultant "blamestorming" has long been cited by international and local research houses and consulting firms as one of the primary reasons that these initiatives have failed so spectacularly in the past."Blaming other people has the attraction of being a simple explanation for problems. It requires no difficult rethinking and it is perfectly credible in any individual case. But, by blaming each other, the real issues go unresolved," says Gavin Sime, Gauteng regional business manager for IT services provider CSC.Winn echoes the views of many in the industry, as well as most research houses, when he states that in the past the "big players got burnt, as customers outsourced to them and abdicated responsibility and accountability".Things have changed somewhat since then, he says. "The set of problems that faced companies five years ago is very different to what we are looking at today. Then there was a lack of methodology and processes around managing the IT environment. This was due to the move from mainframes to decentralised systems, which happened without the necessary controls. These controls are now standard business operating procedures. The role of change of IT has also slowed. The major challenge now is not how to manage your IT environment, but how to leverage the investment you`ve made."The point here is that while outsourcing deals can still be measured by service level agreements (SLAs), vendors are now being required to deliver business benefits, rather than just keep IT systems up and running smoothly. With SLAs no longer considered the most salient success measurement, client/vendor relationships have become more important than ever.Some outsourcing providers have moved to address relationship issues by restructuring their client liaison teams. McLuckie says that EDS Africa restructured specifically "to take better care of our relationships with clients. Previously while we were good at delivering where service level agreements were concerned, we neglected some of the relationships involved." However, this isn`t an entirely one-sided approach - corporates are also going through a mindset shift with regard to these relationships."The outsourcing market is maturing and changing. It`s moving from companies abdicating responsibility by outsourcing problem areas in their businesses to a more measured outsourcing approach," says McLuckie. He says there`s an "enormous" improvement among local companies as to how they manage their outsourcers and a recognition that outsourcing is "very rarely cheaper"."Previously, it was a case of getting rid of a problem. Now companies are starting to ask themselves why they are outsourcing. Also, people tended to outsource the wrong things. For example, if they are outsourcing a call centre function where agents are simply required to answer customer questions, then that`s fine. But when the call centre forms part of its own branding initiative, then it`s possibly not a good idea to outsource it." Costing out contractsWinn maintains that with companies wanting to cut IT infrastructure costs and gain measurable business benefits through outsourcing, contracts and costing models are receiving far more corporate management attention than in the past. While he says there are no specific, set metrics in place to measure business benefits yet, almost all the longer outsourcing contracts now have a yearly renewal clause included, which concentrates on a review of the scope of the project and a look at pricing."The cost plus model is becoming more common, where corporates say to vendors that they`ll look at what it is costing them to keep their systems up and running and then add a percentage on top of that to remunerate them. The accepted margin here is about 20 percent of the overall running costs," says Winn.Seeley states that "when you have an outsourcing contract, part of the contract revolves around reducing the cost of the existing infrastructure. Outsourcing with reduced costs might be one thing, but it is not the most important thing. It is the benefit that can be derived for the outsourcing deal - value add is what corporates need to look for that is important."The length of outsourcing contracts appears to be shortening, with most vendors confirming that the seven to ten years average duration of an outsourcing agreement some years back has dropped to three to five years. McLuckie says, "Contracts are a lot more flexible now. We do a `best guess` as to what it likely to happen as far as technology is concerned in the next three years." This "best guess" often revolves around the "value add" or "business benefit" that clients are now looking for, i.e. innovative ways for a specific company to get the most out of its IT systems, aimed at having an impact on its bottom line by either cutting operating and/or human resources costs, strengthening existing revenue streams or building new ones.McLuckie expands on one way EDS ensures outsourcing produces returns like this through innovation. "You can scoreboard good ideas. For example, you can speak to clients about doing four presentations a year in terms of innovative ways in which you can use technology within the scope of the outsourcing agreement to solve business issues."His company runs an internal programme that acknowledges top performers who convert knowledge and expertise into business solutions for EDS and its clients. The EDS Fellows programme encourages creativity and innovation, identifies sponsors for new ideas, aims to enhance the company`s image and promotes company-wide networking for innovation and thought leadership. This is one of the ways in which EDS "future proofs" its deliveries around outsourcing these days. A forward viewLooking at whether companies can be assured their outsourcers will still be in business when contracts come up for renewal, Winn believes there will be some market consolidation between those vendors that look at the physical infrastructure level."This is becoming increasingly commoditised, and is driven by pricing and the need for economies of scale." He believes companies such as Telkom, Comparex and particularly Dimension Data are well-positioned here as far as future growth is concerned. There will be less consolidation in the niche markets, he says.According to Victor Antezana, business development regional executive at Comparex, the local outsourcing market is currently overtraded with too many companies competing for slices of a limited outsourcing pie."With so many players in today`s outsourcing market, service providers are struggling to achieve the correct economies of scale, especially in the longer term and for annuity income clients," says Antezana. "Achieving equitable economies of scale requires a huge investment in infrastructure, people and processes. If outsourced clients are to benefit from the partnership, they have to be offered access to the latest technology, innovative processes and cost control methodology over a sustained period."With a strong suggestion here that some of today`s outsourcing players might not be around tomorrow, it`s also worth taking a look at what some are doing to develop additional business opportunities. For example, offshore outsourcing and business process outsourcing (BPO) look set to be the next big focus of attention.EDS is apparently putting together a business unit to address offshore opportunities, swapping posts in the US and Europe for newly established positions in India. Arivia.kom is rumoured to be looking at getting into offshore outsourcing as well, but Deist says "it`s early days yet as far as offshore outsourcing is concerned".BPO is also at the beginning of the growth curve. Says Staffware SA MD Mark Ehmke, "The growing trend for enterprises globally is to review their internal operations regularly, to more fully understand what their true core competencies are, and to focus only on these core competencies. This is the primary driver behind the growth of the BPO market."BPO providers who are worth their salt are, by definition and necessity, experts in terms of the process or sub-process that you outsource to them. This expertise then becomes even more focused and niche when one considers that all business processes are aligned to, and defined by, the vertical industry in which the core business operates," says Ehmke.He does, however, caution that the market in South Africa is not really "BPO-ready". He maintains that this is because business process automation, on which workflow is based, is a necessary precursor to BPO, or the outsourcing of those automated processes to a third party service provider.In much the same way, taking an extremely close look at the business reason behind outsourcing IT initiatives and remaining realistic about the expected outcomes, is a necessary precursor to a successful project.