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Out on parole

By Ilva Pieterse, ITWeb contributor
Johannesburg, 12 Jun 2015
Lex van Wyk, Teraco.
Lex van Wyk, Teraco.

When IT was considered a commodity, it made sense to outsource en mass. But the more central technology becomes to the business, the more this trend stagnates. Many companies are now considering bringing their outsourced functions back in-house, with the idea to use emerging technologies and tools to optimise business opportunities.

"Traditional outsourcing does not work in today's IT-dependent business landscape," says T-Systems' CTO Kim Andersen. "Since IT was still very much a back-office function, outsourcing projects were the responsibility of the techies. But since the digitisation of IT, this approach no longer delivers the necessary values."

Technology continued to cement itself within the organisation, and this brought increased complexity and a higher rate of change. As a result, frustrated decision-makers have been contemplating bringing all services back in-house to allow for more agility, enhanced customer service, and overall control.

"Don't be too quick to insource everything, however," warns Andersen. Much has changed in the industry and business since IT was back-office, and you may end up biting off more than you can chew. "A sourcing strategy should be carefully devised and all considerations taken into account," Andersen suggests. "Many businesses today have run themselves very lean and don't have the management skills to handle the increased organisational complexity full insourcing will create. The local market is not mature enough yet." He also reminds us how too much complexity leads to avoidance.

"Don't simply fight outsourcing with insourcing," he says. "Be strategic."

Only way out is in

Quintica director Roger Purdie concurs: "Companies that, for the most part, have outsourced the majority of their IT shops in the past, have developed a reliance on external support and as a result may not have the technical skills on board to support technical requirements of the business. The costs of developing this expertise may prove to be too invasive at first, and will hold back any decisions to insource."

However, he counter-argues that, as new solutions are now built around effective, common-sense processes, this largely reduces the burden. The ITIL framework can be used as a means to overcome challenges of bringing processes back in-house.

"Remember the ITIL framework is still as valid today as it ever was. Software vendors design entire solutions with ITIL process definitions in mind, and the process activities represented in the flow and management of information," he says.

Cloud can also be considered in bringing distant assets back in-house faster and in a more manageable way - and the sooner assets are brought back in, the sooner business can begin to understand what exactly they're managing.

Purdie ascertains how cloud and new technologies, which are more software-defined in nature, are definite drivers for insourcing. "IT is consolidating rapidly," he says. "In order to reach the cloud effectively and for the cloud to deliver on the benefits it proposes, IT needs to be brought back into control so that the business can decide what it can safely put in the cloud.

"Quite simply," he continues, "it's becoming easier for non-IT people to manage their own systems. The age of the IT guru is slipping by and savvy system integrators are now learning about how a business works and not just relying on technical skill sets."

Don't be too quick to insource everything.

Kim Andersen, CTO, T-Systems

He uses software vendors such as HP and BMC as examples of organisations that have recognised this and created versions of their ITIL-compliant service management systems (traditionally on-premises) in the cloud. "Other organisations such as ServiceNow base their entire business model on the cloud and are edging closer and closer to the same technical capability as on-premises products," he says.

Control and complacency are two major considerations in the argument to insource. "You effectively gave the control away when you outsourced, and no matter how hard a vendor tries, there's always going to be some degree of complacency that will creep into a business relationship," Purdie says.

He believes taking back control is perhaps the strongest aspect. "Traditional outsourced operations tend to attract little extras in process, cost and bureaucracy. None of which is a big deal in isolation, but over time - when you sit and analyse where you started and where you are now - it's hard to understand the justification."

Purdie compares insourcing to getting ready to move house. "It forces you to take stock of everything you have and decide if you should keep it, give it away or put it on the rubbish heap."

The good news, of course, is that you do tend to offload a bunch of unnecessary stuff. "Offloading feels good and reduces the cost of moving (insourcing)," says Purdie. "And yes, there will always be a need, especially in enterprise customers, to outsource certain components of the business. But the areas where this is needed are becoming a lot more specialist in nature."

It's becoming easier for non-IT people to manage their own systems.

Roger Purdie, director, Quintica

This doesn't mean the death of outsourcing and managed services, though. "Aspects of business will still need to be outsourced on the basis of pure economics and lack of in-house expertise. Going back to the house, I may decide that it's time to own a boat, but I don't have the capacity to store it at my house. I need to give someone else the job of looking after it, so that I can use it when I want."

In2IT Technologies MD Surabh Kumar provides another way to solve the organisational sourcing puzzle. "Why not outsource to a third-party tech-sourcing consulting company?" he suggests. According to Kumar, this service is becoming increasingly widespread, as demand for this skill increases. "Sometimes it's best to leave it to the experts," he concludes.

The secret is in the source

How outsourcing can help you stay on top.

Always-on connectivity has become a standard. Business hours no longer apply. Customers want instantaneous solutions and, if made to wait too long, they'll simply join the competition. And unfortunately, load-shedding is no excuse.

Teraco's CEO Lex van Wyk has noticed a marked increase in demand for data centre outsourcing services over the last year. "Eskom's imposed rolling blackouts are a big driver for this trend," he says. "Companies know they cannot afford business downtime, so many are making use of off-premise data centres to avoid disruptions."

According to Van Wyk, there has never been a stronger business case for local data centre outsourcing than now. "The obstacles to adoption from a few years ago no longer apply - bandwidth prices have dropped significantly, and cloud has lived up to its promises and is being readily embraced."

There are still those who only trust the idea of having their own physical data centre on the premises, but this is not forward-thinking, says Van Wyk. "It doesn't make sense to spend all that extra money on hardware power costs, and space.

"Where do they think the industry will be in the next five years? Mobility will continue to drive outsourcing and cloud adoption. And those that don't embrace these trends will lose to the competition."

Outsource for the win

Quintica director Roger Purdie believes it makes good economic sense to find alternative ways of running non-core and even core aspects of your business.

"Take Nike. You think they make shoes. They don't. They are a brand that people want to buy. There is easy research to suggest that the actual production cost for your R1 000 Nike shoes is R300. This is perhaps the best example of outsourcing a core business function.

"Take that concept and apply it to your non-core functions and the numbers stack up as strongly. Imagine 10 companies each with two full-time employees each managing a similar system in their respective businesses. Now ask one company to take over the management of all 10 systems. The synergy and economies of scale are staggering. Rather than 10 discrete operations by each company, you change the process and run a housekeeping function for 10 systems as a single job."

Businesses leverage off each other and the managed service provider now employs six people to look after all 10 systems and charges much less than the original cost to the business, and still turns a neat profit for themselves, he says.

"Extend that model into management or ultimately outsourcing the infrastructure, the system itself, the network, etc, and the savings multiplier kicks in big time," Purdie concludes.

Because I'm worth it

Value, not cost savings, drives outsourcing uptake.

Customer demands for IT outsourcing services are changing, and providers must up their game if they want to keep their clients happy. To date, drivers for outsourcing have largely been cost-savings and process improvement, but companies are realising their analysed data could be worth more.

"Organisations are seeing the value analytics can bring to their collections of unstructured data," says Alida Taylor, KPMG director: shared services and outsourcing advisory. "Turning data into knowledge that can be used to gain customer insight is the true value driver of IT outsourcing."

A 2014 HfS Research Report, done in conjunction with KPMG, states clients are rapidly losing patience with services providers that aren't working proactively to provide more than the basics. As much as a quarter of clients are actively looking to fire their provider if demands cannot be met.

"Providers are being held to a much higher standard than ever before," Taylor says. "The majority (60%) see operational analytics as a very important outsourcing outcome, and just as many are expecting their providers to provide savvy talent and better technology within two years."

As for what functions are most often outsourced, KPMG's South African Sourcing Advisory Pulse Survey for 2014 included data analytics as an option for the first time. "Data and analytics rate consistently highly throughout the survey, which shows how much of a priority it has become," Taylor points out.

In SA, emphasis is very much on IT outsourcing, with business process outsourcing closer to the bottom of the list of priorities, the survey revealed. "This ties back to businesses regarding greater access to innovative technologies as an opportunity to be leveraged," says Taylor. "It's also one approach to compensate for the local skills shortage."

Delivery models

As past Pulse surveys also revealed, South African companies are comfortable employing local delivery models (such as shared services and domestic outsourcing), but not yet offshoring or near-shoring.

"The trend is mainly driven by the macro and micro environment in which local organisations operate," says Taylor. "The pressure to create employment locally and the legal implications of making employees redundant are key factors for an organisation considering an offshoring initiative."

However, KPMG still believes, in the future, the majority of organisations looking to expand into Africa will consider an operating model that has an offshore or near-shore component to enable better delivery overall.

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