Why do SA retailers outsource elements of their IT function, how do they make the decision, and are they happy with the results?
In late 2006, Paul Middleton, Managing Consultant at UCS Solutions, conducted an in-depth survey as part of his Henley MBA. He studied 17 of this country`s largest retailers, 16 of which have turnovers in excess of R3 billion per annum. He got 48 responses from a roughly even split of business and technology-focused senior management, which lead to some surprising findings.
When South African retailers are looking to outsource, it is often because they don`t have the appropriate skills in-house, rather than because they want to save money (the norm overseas). Outsourcing decisions are also made more often by senior business execs in SA, rather than the technical managers. These slight behaviour differences reflect both some unique characteristics of our market, as well as some strategies that need to be reviewed if retailers want better returns on their IT outsourcing investments.
What is spent on IT and outsourcing, and why?
Retailers on average spend 1.2% of revenue on IT, although this ranges from 0.3% to 2.8% depending on the retail industry sector and the customer value proposition. Of this IT spend, more than half (55%) is spent with external partners.
Retailers were asked to rate reasons for outsourcing: the top response was "to gain access to skilled resources". Other highly rated answers included: "to improve technology" and "to focus IT staff on value-adding activities". This rationale is significantly different from overseas, where "to reduce cost" is the top reason (Lacity M, Willcocks L 1998 and IAOP 2001). Cost was rated only seventh in the South African study.
Three groups of activities were cited as adding significant strategic value: planning, buying and organisational infrastructure activities. Of the activities that were rated of high or very high strategic importance, only a quarter were outsourced, in keeping with international trends. Surprisingly, activities of low strategic value - the parts of the retailer`s business most suitable for outsourcing - were also predominantly kept in-house (a massive 86%). The reason for this is unclear - possibly entrenched business habit, or perception that outsourcing is expensive for "things we already do", or a misapplication of the outsourcing principle.
How do retailers select suppliers?
Do retailers differentiate when selecting suppliers of strategically important activities versus those that are not? Sixty percent say they use the same selection criteria for all suppliers. The top three supplier attributes were given as flexibility, ability to build relationships with the supplier, and the leading products that the supplier offers.
For the 40% who do differentiate when selecting suppliers, low cost ranked lowest as a criterion for suppliers of strategically important services. Needless to say, for services not considered strategic, low cost was top of the list (of 20 options).
Which decision-making process leads to winning?
Of 36 projects examined, 36% were considered successful, and 34% were unknown (an even split between "too early" and "unable to tell"). The remaining 31% were considered unsuccessful. Internationally, the Lacity and Willcocks paper found that 56% of projects are considered successful.
What may go some way to explain the lower success rate in South Africa is how we differ in who sponsors the outsource decisions, and the process used.
In South Africa, 58% of outsource decisions were driven by a Business Executive, with a 62% success rate. The other 42% is largely "decision by committee", with only 8% of calls made exclusively by the IT decision-maker. This contrasts dramatically with overseas patterns, where 41% of outsourcing decisions were taken by the IT manager, of which 90% were successful.
What is particularly concerning is that in 42% of the cases locally, no formal process was used to make the outsource decision. There was only a 40% overall success rate. A process where vendor bids were compared to current IT costs occurred 42% of the time, and was more successful (64%). Overseas, comparing a vendor`s bid with a new internal bid (where the IT department showed how it would change its current modus operandi) was most successful at 89%.
When considering IT outsourcing, some hard but crucial questions need to be asked to ensure the business realises the desired returns from the decision.
Paul Middleton is Managing Consultant at UCS Solutions, part of the listed UCS Group. He grew up in the UK, but now lives in Johannesburg, where he enjoys standing in the summer rain watching the lightning. He can be contacted at paul.middleton@ucs-solutions.co.za.
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