IT Outsourcing is a very mature business. The benefits are well known and, in today’s competitive environment, it is still very attractive for the C-suite. Typically, these benefits are of a pure financial nature achieved primarily through labor arbitrage with an icing of “process and operational excellence” on top accounting for some additional savings over time. Often there is an element of rationalization which may reduce the managed portfolio and again account for some savings.
Outsourcing can also function as a catalyst to get bloated IT organizations, unable to make changes themselves, to the next level of maturity and performance by virtue of forced adaptation of the outsourcers’ industrialized processes, tools and wholesale replacement of personnel. It’s like the old adage: “sometimes, when you cannot change people, you have to change people”.
And, since most outsourcing arrangements are SLA-driven, there is much more objective measurement of performance and productivity that is usually directly tied to financial penalties.
So, better, faster, cheaper. What’s wrong with that?
Today’s IT is in incredible flux. Cloud transformation is probably driving most of this right now on the cost/agility side but there is obviously also a lot of rethinking of the role of IT in the Digital world and the value IT should be contributing to the growth of the business. The question that naturally arises with regard to outsourcing in this environment is whether outsourcing is the right thing to do. Assuming your IT organization is not immune to these forces, do you really want to lock in your capabilities for a period of 3-5 years while your competition is transforming? Below are three options as practiced today.
Outsourcing to reap savings (outsourcing the past)
Presuming that the organization has a transformation plan, I have seen organizations make the argument that legacy capabilities should be outsourced to reap savings, so that these savings can then be utilized to invest in future capabilities and IT transformation. While that is certainly an option, it requires tremendous discipline. Because, if outsourcing improves the numbers in the short term, it may be challenging to actually reinvest these savings. Everyone agreed on the cost reductions, not so much the investment/transformation agenda. Besides, any outsourcing vendor may have a vested interest into maintaining the status quo and be less interested in e.g. a cloud transformation that would drive down its fees. So, better may be to look at a more comprehensive and strategic sourcing strategy as described below.
Strategic sourcing to improve capability (outsourcing the present)
A second option is to look at outsourcing deals as making “trades”. This view is encompassed in the role of modern IT as a “services broker”. In this model, IT can find partners that represent opportunities to buy services for less than IT could provide these themselves and can then capture the value in the form of cost reductions or improved capabilities. In this scenario, IT does not see itself as having unique capabilities as a source of competitive advantage. Rather it is the tapestry of “deals” that make it unique. While a viable strategy, it requires serious thought with regard to the strategic skills the IT organization will invest in and hone. The danger is obvious: unless there is an in-house managed critical strategic portfolio left, there is no unique skill set required and IT will source itself out of existence with a couple of “traders” and 2 or 3 compliance/security guys left standing.
Outsourcing technology-led business innovation (outsourcing the future)
It is a long standing practice in many organizations for the “business” to approach IT consulting organizations directly with business problems, bypassing internal IT. The consulting organizations will apply their experience, specialization and standard solutions or design-ware to the problem and help create an effective solution to the business problem in less time than in-house IT. In the Digital realm, when trying to stay ahead of the next market disruption, even the business may not know exactly what it is looking for. A more advanced model of innovation/business consulting in this scenario is the Capgemini/Sogeti Applied Innovation Exchange. In this model the consulting organization (Capgemini/Sogeti) itself plays a brokerage role and puts the business organization directly in touch with a network of technology innovators (start-up companies) that has the potential to create a technology-led business ecosystem driving market disruption.
So what does this all mean for IT organizations with regard to outsourcing and transformation? Unless IT transforms itself, IT will be transformed by others with very little left standing. To survive as a relevant entity, IT must
- Set and drive the transformation agenda
- Be very clear on the strategic role IT seeks to play long term
- Be relentlessly engaged with the business and the customers of the business