Why can't the IT industry get outsourcing right?
It took Thomas Edison, the great American inventor, over a thousand unsuccessful experiments before he eventually perfected the way to make the light globe work. I wonder whether it might take the IT industry as long to get outsourcing right. As a 25-year wizened veteran of this industry I've witnessed bureaus, facilities management, ASP models, total outsourcing, grid-based computing models, utility computing and, more recently, business process outsourcing and offshoring. As my mother once told me, if you don't succeed at first then try, try again.
Why can't the IT industry get outsourcing right? The concept of using external organizations to deliver services has been around since business began. Companies recognize they can't do everything. In almost every avenue of IT there is scope for outsourcing arrangements. This can include application development or running a help desk or operating a data centre. Certainly the evidence from the research companies is that the IT outsourcing market in Asia Pacific is growing at a faster rate than the IT market as a whole.
But to describe the IT outsourcing track record as "lamentable" would be a compliment. In fact, Deloitte recently reviewed 25 major outsourcing contracts in the US and it found that in almost every instance the expectations for outsourcing had not been matched by the reality. Among the reasons cited for pursuing outsourcing were factors such as access to high-calibre labour skills, a desire to transfer risk, a need for greater flexibility and, above all, cost savings. Yet after implementation, users have found that vendors don't have the skill sets and have high staff turnover, while the outsourcing process itself often results in a rigid contract that restricts flexibility. Moreover, nearly 40 percent of respondents discovered that their costs had actually gone up. Outsourcing seems to be yet another example of suppliers who make a habit of over promising and under delivering.
Nevertheless, Deloitte argues that IT outsourcing can still deliver value to companies that harness it for the right reasons. However, they stress that cost reduction is not one of them. Instead their analysts believe CIOs need to put a lot of effort into articulating the business case, particularly on how benefits will be harvested. Deloitte also emphasizes that the organization will need to be able to undertake a cultural change of attitude from being "doers" to "managers of doers". In particular, it sees they will need the in-house ability to supervise the deal from inception to execution.
Deloitte identifies five potential scenarios when it believes outsourcing can be a useful solution. The first it calls centralize-standardize-outsource. This is where a company first consolidates and standardizes processes centrally. Then when these processes are well understood it hands over the management of them to an outsourcer. The second situation is described as transform-operate-transfer where organizations are engaged to transform a function and to run it for a short period before transferring it back to the customer. The next is termed risk transfer, which is pretty self-explanatory. The fourth outsourcing scenario is commodities outsourcing where companies elect to outsource non-core and non strategic functions to a vendor specializing in these areas. The final circumstance described by Deloitte is titled fixed to variable costs where services are transferred to an external party in order to turn current fixed costs in to variable ones, with the aim of influencing the internal consumption of these services.
I am not sure whether I shall have retired from the IT industry before suppliers get outsourcing to work effectively. However, Edison's example should give them some heart. The incandescent lamp was, in fact, invented by a German clockmaker called Johann Heinrich in 1854. Edison then developed the concept and turned it into a usable product in 1879. Interestingly that's 25 years, the same as my tenure in IT. Perhaps the wait for effective ICT outsourcing could be nearly over.
Peter Hind is a freelance consultant and commentator with nearly 25 years experience in the IT industry. He is co-author of The IT Manager's Survival Guide and ran the InTEP IS executive gatherings in Australia for over 10 years