As many organizations are moving into their second and third generation of Information Technology (IT) outsourcing, they are looking beyond cost reduction to significant business advantage in their outsourcing relationships. Which organizations have achieved that advantage — and how? For the past eight years, two academic researchers have studied those questions and identified the practices common to success.
The study has culminated in a book, Global Information Technology: In Search of Business Advantage, which is expected to be accepted by a publisher shortly. Mary C. Lacity, Ph.D., associate professor of MIS at the University of Missouri-St. Louis and research affiliate at Templeton College, Oxford University, is one of the authors. Her co-author and research associate is Leslie P. Willcocks, Ph.D., fellow in Information Management and university lecturer in Management Studies at Templeton College and visiting chair at Erasmus University in Rotterdam.
Staying Engaged With IT
Lacity and Willcocks conducted in-depth case studies in over 75 organizations and surveyed 600 CIOs in the U.S. and U.K. Out of that research, some common practices among companies that have succeeded in gaining significant business advantage emerged. One of those was that the companies stayed engaged with IT and retained clear IT capabilities, rather than stepping aside.
“We find instances even in what we call mega-deal or total outsourcing where you spend at least 80 percent of your IT operating budget through outsourcing contracts that there are still key roles and capabilities that every organization must keep internal,” says Lacity. “We’ve actually identified nine key capabilities that must be kept in-house.”
Lacity divided the nine roles into three categories. The first are the ‘IT vision roles.’ “Even though IT is an enabler of business strategy, you don’t want your suppliers setting your business strategies,” she says. “So you have to have internal roles that serve as your business system ‘thinking’ kind of roles.” After the business agenda and strategy has been established, people in those ‘vision’ roles explain to the organization how IT can contribute to the fulfillment of the business strategies and objectives.
The second set of roles involve management of delivery of IS services. Those roles, according to Lacity, include things such as negotiating and monitoring contracts, supplier development and encouragement, and informed buying. “Somebody has to be held accountable for the delivery of IS, even if it’s through all these contracts,” says Lacity. “These are those people.”
The third set of roles — design of IT architecture — was a surprise in the findings, according to Lacity. Although many organizations view architecture design as a technical aspect that can be outsourced, Lacity says research shows that the platform needs to be defined in a business context. The organization, not the supplier, needs to decide what kind of highway they want, she says, because the supplier may select the architecture that is the easiest to deliver rather than what is best for the organization.
“Suppliers can manage networks. They can assemble networks; they can do all that,” says Lacity, “It’s just the management and design of the architecture that must be held internally.”
A Broader Scope
Another factor common to success is a mix of objectives, rather than the over-riding cost reduction agenda that drove the earlier generations of outsourcing. Now, says Lacity, organizations also are looking at such objectives as investment avoidance. For example, a customer looking at a major capital expenditure for architecture might find a business advantage in pushing the investment to an outsourcing supplier and paying an annual fee for service. In yet another example, the government of South Australia and EDS have an agreement where an objective is to spur economic growth.
Successful organizations also utilize a mix of sourcing approaches. According to the key findings, they substitute the question of “why not outsource IT?” with the more meaningful “how do we exploit the ever-developing market for IT services to achieve significant business leverage.”
Lacity says that finding does not mean that an organization using only one vendor cannot be successful.
“It’s just that our data shows it’s easier to have multiple suppliers, because then you can do best of breed — like this supplier’s excellent at telecom, this supplier’s excellent at developing new applications, or this supplier has some fabulous industry specific expertise,” she says. Utilizing multiple suppliers also can reduce risk if anything happens to the supplier.
Good Contracts Equal Good Foundations
Another common element revealed by the findings is the need for detailed contracts that document the expectations of both the customer and the supplier. “Good contracts are the foundation of good relationships,” says Lacity.
And one way to keep those contracts good, according to Lacity, is to sign them only for requirements that are known and stable. “Usually in the IT world, that means about three or four years at the most,” says Lacity. “You can only know details for a short term in the future, because IT changes so much…Anytime you have a major change in your business, it affects your IT contract.”
Customers normally want a short term contract and Suppliers want them to last as long as possible to get back their investments. The numbers from the survey, however, support the customers’ position. Lacity says a clear finding of the survey was that shorter term contracts had a higher percentage of success than long-term contracts.
Also in the contract area, the survey found that most successful outsourcing relationships included incentives for suppliers. Along with the more common incentives for performance of service level agreements, Lacity says some customers now are adding to contract pricing renegotiation points, benchmarking mechanisms, veto power over the account manager on the vendor team, and market testing (or taking competitive bids on work that goes beyond the scope of the contract).
The Changing Marketplace
The survey shows how much the IT outsourcing industry has changed, according to Lacity.
“The global marketplace is changing and evolving, and it’s always more to the customers’ favor,” she says. “Customers have done a lot of learning on how to do successful outsourcing, and the suppliers have gotten more sensitive to customers’ needs, although that may be through competition.
“There are more niche players in the marketplace,” she adds, “more user groups in outsourcing where customers can get together and talk about common problems and put pressure on suppliers if needed. We’ve really seen customer empowerment in the last three or four years.”
Lessons from the Outsourcing Primer:
- Three sets of roles should be retained in-house: strategy planning, management of IS service delivery, and architecture design.
- Organizations that outsource successfully employ a mix of objectives.
- Organizations that oursource successfully utilize a mix of sourcing options.
- Detailed, short-term contracts are an element common to successful relationships.
- Most successful relationships include supplier incentives for performance.