When Will Outsourcing Grow Up?
by Walter Adamson

"By the end of the first year, more than 50 percent of the companies that have outsourced major IT functions are unhappy with their outsourcers, according to an informal survey of my clients. By the end of the second year, 70 percent are unhappy. Studies by DiamondCluster International Inc. and PA Consulting Group have also uncovered significant amounts of dissatisfaction with outsourcing deals." Bart Perkins - ComputerWorld 22-November -2003.

The considerable investment of money and enormous investment of time and attention given to outsourcing has unfortunately not been matched by satisfaction. Surveys consistently show that between 30 and 50% of executives indicate disappointment in the results of their investment in outsourcing.

Outsourcing is by no means new, and some firms have achieved outstanding results in terms of business improvement. What are the lessons from the firms that have succeeded and from those that have performed poorly?

Lessons from the strongest performers include these actions:

  • Analysing trade-offs for IT sourcing holistically. What does this mean? It means involve purchasing, sales, engineering, manufacturing and top management in IT outsourcing decisions;

  • Tracking well-defined metrics. The metrics should be a combination of business-oriented metrics and also easily benchmarked global metrics for the base and commodity services and pricing; and,

  • Sharing forecasts with their outsourcers. Forecasting, and its impact on IT services, is difficult. But by forecasting diligently and communicating this to the outsourcer, many surprises and mismatches in performance and expectations can be avoided.

However the biggest single root cause of success in companies that are satisfied with their outsourcing is that they set IT sourcing policies strategically. Conversely, the failure by companies to set IT sourcing strategically has led to much of the disappointment among executives today about IT outsourcing.

First and foremost a company must set its strategic objectives and then establish IT sourcing policies to meet them. This naturally leads to the question:

"What is the best source for every IT service to meet our objectives?"

However, where things go wrong, and where companies leave IT sourcing to a tactical or departmental level, the question that reverberates in the corridors is:

"What do I have in IT that seems appropriate for outsourcing?"

Starting from the first question focuses on customers, because a firm's strategy will focus on customers. Starting with the second question relegates IT sourcing to an internal focus, generally with little cross-functional involvement, and thus missing the holistic approach. Thus the second approach necessarily delivers limited benefits.

These latter efforts fall short in satisfaction because they do not challenge, and support, the cross-functional processes inside the company. They focus on performance gains, often just cost-performance gains, within the existing limitations of IT services.

It is a decade since the publication of Michael Hammer and James Champy's Reengineering the Corporation, and focusing on cross-functional processes has become the norm today in such disciplines as supply chain management. This has also brought about the concept of the "extended enterprise" and leaders in the field take a broad strategic perspective of their enterprise.

In contrast, most IT sourcing decisions are still functionally-focused. Even worse still, they are often the domain of the IT department to decide, according to their concern for their individual performance measures and technology biases at the time.

In order to grow up, IT sourcing innovators must break this tactical decision-making process and encompass the extended enterprise.

Leaders, such as Cisco, have even coined a new term for this strategic approach in order to distance it from the failed tactical model. Cisco's John Chambers calls it "outtasking".

The focus in "outtasking" is for a firm to fully extend itself into its partners' business systems, while retaining tight control of its own core systems architecture and data architecture and standards. The value chains are highly synchronised.

John Chambers, as CEO of Cisco, frequently espouses this operating philosophy and it is clear that he is deeply involved in such decisions. A recent study by Booze Allen Hamilton found that CEOs can play a key role in improving the supply chain. The study found that greater CEO involvement in designing supply chain strategy brought about improved business performance.

There is little doubt that in order to improve IT sourcing performance and to lift the rate of satisfaction, CEOs need to participate more actively, pay closer attention, and get more involved.

Walter Adamson is the Founder of Digital Investor, based in Melbourne, Australia, where he helps IT service companies design more effective value models and strategic partnerships. He also helps CIOs develop the commercial maturity of their company's IT management strategy - in particular the challenges of business-IT alignment, developing value propositions, and designing effective sourcing strategies for IT services. Interested readers should contact Walter to arrange further discussion or an interview. If you are responsible for IT in your organisation you might like to read the CIO Business Innovation Series of free White Papers at www.digitalinvestor.com.au. Walter can be reached at adamson@digitalinvestor.com.au and phone +61-403-345-632.

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Copyright 2004 by Walter Adamson. All rights reserved.

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