James Cockroft of Xantus says IT outsourcing styles must evolve once more to stay relevant

While the UK may be starting to rise out of economic recession, the recent financial crisis and the ensuing large rise in national debt will leave a severe burden on the public and private sectors for many years to come.

Indeed, the Government has already admitted that the public sector is facing impending and significant efficiency savings, which will include cuts in spending. Many private-sector firms have felt the impact of reduced income and tightened lending, leading them to scrutinise all aspects of their business.

IT delivery is not immune to this financial pressure, and so from national and local government through to big business and SMEs, today’s principal IT challenge is to reduce costs, whilst maintaining or even improving service quality.

For large organisations, an obvious place to start is their current sourcing arrangements, and for many this means scrutinising any existing outsourcing deals.

One key question is whether traditional large-scale outsourcing schemes continue to offer the best option in the current climate – and with many first and second-generation outsourcing contracts up for renewal, we are seeing a clear change in how and why organisations choose to outsource services.

The question being asked is simply: is IT outsourcing still the best option for cost-efficiency and service delivery?

Evolution
To address this issue, we need first to understand the trends currently at work in the sourcing market.

In the past, when IT demands were not as complex and all-encompassing as they are today, organisations of all types maintained inhouse IT departments. However, as the relationship between IT and organisations became more complex and covered more and more areas of business and administration, it became increasingly difficult to ensure that an inhouse department had the right skills and flexibility to fully cope with these changes.

So by the 1990s the option of outsourcing became much more popular, with entire departments and functions farmed out to external suppliers, who enjoyed relatively lengthy contracts for this first-generation outsourcing work.

There were clear advantages to such arrangements, both in terms of costs and impact on processes. In the area of cost, outsourcing helped organisations avoid the need for expenditure on recruitment and permanent staff as well as equipment and space.

Meanwhile, they were able to access innovation, skills and relevant high-level experience that would otherwise be prohibitively expensive and unwieldy for many to cover through inhouse staffing. There is also a significant potential advantage for risk mitigation in any outsourcing arrangement.

However, as with any evolving practice, these first-generation contracts had their flaws. So organisations were able to highlight areas for improvement and, in more recent years, negotiate more convenient and efficient contracts as they came up for renewal.

Flexibility and agility have been the watchwords in this evolving climate, with the increasing realisation that wholesale, ‘uni-fit’ outsourcing arrangements with one external supplier do not necessarily best meet companies’ demands. In short, the evolution of IT delivery has passed from inhouse, to the use of managed services, through to outsourcing.

New arrangements
There are a number of key characteristics for service agreements that have changed over the years.

Inhouse services (basic) tend to be centred on technology, with suppliers looking to impress and provide the best level of support. But as organisations took up the option of managed services and outsourcing (transformed), we have seen a greater emphasis on services rather than the technology itself, with rigid standardised practices enshrined as both parties acclimatise to the arrangement. It is not uncommon for a portion of the work, around 5-10%, to be ‘at risk’ due to poor service performance.

The current trend (innovative) has shifted the focus once again, to the business itself and the benefits that outsourcing brings, with an holistic ‘end-to-end’ approach often taken. Service level agreements tend to become more variable to accommodate the organisation’s growing recognition of precisely what it requires from a supplier, whilst it is not uncommon for at-risk work to grow to a proportion of 10-15%.

This evolving nature of outsourcing, and the way in which organisations are realising more fully their requirements under such arrangements, has led to a climate where multi-sourcing is the favoured option.

The principal perceived benefits of multi-sourcing are that it tends to introduce better choice and also a competitive tension into supplier relationships that can drive better service and more added value. Further, many organisations are using the opportunity to re-take ownership of key functions that would previously have been outsourced.

These changes have meant that both buyers and suppliers have had to adopt different behaviours, skills and above all attitudes to ensure quality service provision. Crucially, the current economic problems have seen both sides keenly feeling the need to reduce costs and overheads wherever possible – which has led to different and potentially opposing behaviours from the two parties.

On the buyer side, the key concerns include flexibility of delivery, cost reduction across-the-board, and the possibility of increasing competitive tension to try and maximise the other two factors in their favour.

Conversely, suppliers are seeking better revenue recovery, longer commitments and a reduction in value-added services to ensure turnover is maximised and unnecessary spending on cost and labour is kept to a minimum.

Effective outsourcing
So to return to our original question…is outsourcing as it stands working for organisations? The answer appears to be that it can prove a very useful tool – provided all parties realise they must ensure that the right practices and structures are in place to make the most of the arrangement.

So how can outsourcing be improved? Clearly, with greater understanding of their own requirements and how these can be met by suppliers, buyers need to make sure they have a suitable operating model in place.

This relates to their internal structure just as much as their expectations of suppliers – and it’s often no small task. If the organisation fails to change its structure and skills when adopting a new sourcing approach, it can be difficult to reap the full benefits.

However, if this is done successfully there are clear advantages. Firstly, the buyer can maximise the potential of the contract by ensuring its own organisation is best positioned to work with the supplier. With a suitable internal structure, it can achieve clarity on roles and responsibilities, with clear accountability and appropriately skilled resources. It can also better identify and address any potential overlaps or gaps in service.

From the perspective of what the organisation can expect from its supplier, there are a number of elements that help to make the arrangement successful. A large element of this is based on the fact that contracts are becoming increasingly servicebased and aligned to wider business demands.

Understandably, relationships are key to productive working, and so at the simplest level it is important that the buyer and supplier are able to work together with honesty and integrity. Further, a basic service delivery level may seem a given, but it is vital to ensure that the supplier can do the important things right, before taking into account added value and other extras.

Buyers should also seek to involve relevant suppliers in establishing good practice, to ensure all parties are clear on requirements and able to offer their advice and expertise on how best the arrangement may work.

This ties in closely with the need for good governance, to make sure best practice is put into place from the bottom up and with complete buy-in from all involved.

Crucially, buyers must analyse their own and potential suppliers’ strengths and weaknesses to recognise what choices they have. For example, if the organisation is strong at delivering a particular function, an objective decision needs to be made on whether the function should stay inhouse or the supplier is better placed to take on the responsibility.

Furthermore, with multi-sourcing becoming more popular, both buyer and supplier cost drivers have led to an increasing tendency to contract some aspects of IT services overseas via offshore arrangements. India is now a well-established market for such practices with others such as China, Eastern Europe and Latin America emerging.

It is interesting to see, though, that different services are at different levels of maturity – as indicated by their take-up by organisations. For example, helpdesk and application development/maintenance offshoring are both well-established, but remote infrastructure management and project management are less so.

Therefore, potential buyers should be careful to assess whether the cost savings offered are suitably matched by appropriate service delivery and technical capability.

Offshoring also presents some distinct challenges to organisations, which may require changes in behaviour and attitudes in order to ensure successful working relationships. Existing buyers have overcome these issues in a number of ways, most significantly by blending onshore and offshore resources within any agreement.

The future
With an evolving area such as outsourcing, it is important to assess where things may move in the future, and how this would affect both the buyer and its suppliers.

As buyers adopt more flexible multi-sourcing, they must also consider the risks inherent in this approach – such as greater complexity in contractual arrangements and ensuring successful working between different suppliers.

With this in mind, future outsourcing is likely to focus on aligning contracts wherever possible, and developing operational level agreements (OLAs) between suppliers through end-to-end operating model design. In all likelihood, future arrangements will need to accommodate an increase in internal team sizes and capabilities, as buyers look towards a more multi-sourced approach.

Bearing in mind all these factors in achieving successful outsourcing, it seems likely that multi-source arrangements will continue to grow in popularity. They offer the flexibility required by buyers to keep those aspects of IT they are good at inhouse, whilst seeking the best service level and cost-efficiency in services sourced from external suppliers.

As these multi-source arrangements gain in popularity, new challenges are being faced by organisations. They need greater commercial management capability and an enhanced service integration function; this approach also potentially increases endto-end service risk as supplier arbitration becomes necessary.

It is clear that outsourcing in some form will continue as a mechanism to reduce costs. But going forward, organisations must consider what represents the best form of outsourcing and, crucially, what realistically lies within their capabilities.