Many outsourcing contracts are still driven by the aim to cut cost. Cutting cost can be achieved by economies of scale and standardization of similar activities and assets. This means that the scope of typically outsource contracts is defined in terms functional area’s or processes (e.g. IT infrastructure support, payroll, logistics).
Many of the functional area’s or business processes being outsourced can often indeed be split off without large consequences for the retained functions and business processes. There is however at least one area where these standard outsourcing practices start doing more harm than good. One of these area’s is IT.
The rate IT is absorbed by business processes has never been so high and soon almost every items we use in daily live including clothes and food, will have some kind of IT component. At the same time is there the relentless pressure to cut cost and innovate, increasing the complexity and dynamics for the organization as a whole.
The role of IT (for many companies) shifts thus from a facility to an integral part of the value business chain. The IT department is in the meantime however still managed as it was 20 years ago. The CIO has its budget and targets. Targets which often focus on cutting cost and what remains is used to build and run functional requirements from the business.
The result is that the governance of IT (and thus sourcing strategy) gets more and more misaligned with the actual demand from the business. IT is not just a provider of automated business activities, but becomes an integral part of the business value chains.
The typical IT outsourcing deals are however still based on outsourcing a functional silo (e.g. network support, infrastructure support, application support, development). An silo which delivers services to business value chains with differentiated demands. These differentiated demands get however lost when the external vendor starts the transition/transformation as the primary focus of most outsourcing contracts is on cutting cost and thus standardization.
The result is business managers running their own IT when it really matters. Especially companies that have to make the transition from ‘old economy’ to ‘new economy’ are prone to have more than one IT department. One official IT department which is treated by the business managers are a facility provider plus the decentralized IT departments which are closest to the business processes.
What does this means for those involved in outsourcing? It means two things. First of all: understand the business model of your company before outsourcing (e.g. dynamics, strategic positioning, important trends). Understand the key value chains of the business and its dependencies on supporting processes and functions. This understanding allows you to define a scope which is not simply based on functions or departments, but a scope which is aligned with the essence of the company.
Secondly, move away from the typical purchasing approach on outsourcing (fixed service description and price) to an approach which is more aligned with today’s business dynamics. An approach which includes:
principles of game theory,
entry and exit from suppliers,
selection and management of sources of supply,
cost development over a long term.
This way the chance of an outsourcing engagement delivering long term value instead of only a short term cost reduction is greatly improved.