One thing is clear: outsourcing to cut costs is not good enough in today`s business environment of expanding opportunities and rising challenges.
CSC`s Leading Edge Forum (LEF) last year researched major Fortune 500 companies on the value, challenges and future of outsourcing. It found that fewer than 20% of outsourcing customers are dissatisfied with their overall cost/benefit experience.
Outsourcing providers and their customers now understand that they need to improve the ability of the partnership to add value to the business, just as they have traditionally used outsourcing to reduce costs.
LEF`s research uncovered specific reasons why increasing the business impact of IT outsourcing has proved elusive. Among these, is the fact that many companies outsource because they have problems with IT. Internal and management and decision-making culture cannot be resolved by outsourcing. Unless these are addressed, the outsourcing relationship can suffer from these underlying issues.
Companies tend to outsource IT because it is not core to their business. Unfortunately, this often leads companies into the misconception that IT is not important to their business. However, IT is now so pervasive companies need to have efficient and competent IT operations, irrespective of whether they are core activities to the business.
Our research also found that long-term strategic implications of outsourcing are often sidelined, while providers and clients focus on the short-term financial and management gains. This leads to contract rigidity - an outsourcing relationship that is inflexible about compliance with detailed, long-term measurable contracts, with punitive terms for missed targets - at the expense of innovation and responsiveness.
Then, there`s bargaining for power in the relationship. Before the deal is signed customers aggressively drive down costs, but once the deal is signed, the supplier uses the associated lock-in to restore acceptable margins. Neither attitude is healthy for the relationship.
Internal and management and decision-making culture cannot be resolved by outsourcing.
Martin Vergunst, MD, Computer Sciences Corporation SA
Hopefully, those issues are beginning to disappear because dynamic business needs support from its outsourcing service providers that is both flexible and agile. It is therefore recommended that customers and providers take steps to manage the outsourcing process better and ensure that both sides` interests are better aligned in the short- and long-term.
This will bring about an era of dynamic outsourcing, which refers to the overall mindset and contractual process that lays the groundwork to enable the potential of outsourcing to be fulfilled, based on the premise that these seemingly difficult problems can be resolved by implementing five changes. These are:
* Strategic and tactical governance: Outsourcing must serve the business, not the IT, agenda and contracts must be grounded in a clear sense of where the business is going. This means customer management must think beyond tactical concerns and opportunities, and factor in the full strategic consequences of their outsourcing decisions.
* Technology usage as a core competence: Companies must decide whether outsourcing is the best way to fulfill their ongoing need for IT competency.
* A shift from cost saving to cost-effectiveness: Most IT is not a commodity so value, quality and innovation must be brought back into the outsourcing price/performance equation by using a balanced-scorecard approach to achieve meaningful cost-effectiveness to leverage the capabilities of the outsourcing partners.
* Alignment of customer and supplier interests: Contracts must motivate suppliers to do the right thing and be proactive in support of the customer`s business. Close alignment of financial interests is the only way to sustain productive long-term business partnerships.
* Flexible, fixed contracts: Flexibility must be built into the design of the outsourcing contracts so they are capable of addressing changing customer priorities and objectives without requiring complex, new negotiations.
While this approach is easier said than done it will lead to improved partnering that will be beneficial regardless of the specific outsourcing goals.
The principles of dynamic outsourcing will apply whether the goal of outsourcing is transformation, innovation or cost-cutting. Forward-thinking companies should begin to incorporate these concepts into their existing and future outsourcing relationships.
For more information about the Leading Edge Forum and to access the full LEF report, click here.
Share