The Changing Nature of Outsourcing | Article

Melting ClockOutsourcing has changed since the early days of the industry in the 1970s, when outsourcing relationships were essentially time-sharing arrangements and facilities management. One of the people studying the movement is Varun Grover, Ph.D., professor of Information Systems and Business Partnership foundation fellow at the Darla Moore School of Business, University of South Carolina. In January, the publication Decision Line recognized him as the second most productive researcher in Information Systems from 1991-1996, based on pages published in the top six journals.

His study of management of information systems has included how information technology can be used to make organizations more effective, as well as the impact of technologies on interorganizational relationships.

“The nature of outsourcing has changed from facilities management and time sharing to functional outsourcing,” he says. “A lot of companies are outsourcing telecommunications, system operations, management of PCs and the computing infrastructure, even strategic planning in some cases.”

In his study of hundreds of outsourcing agreements, some of the findings are basic: service quality is critical to success, operations is viewed as a commodity and frequently outsourced, and partnership is important in the outsourcing of systems operation.

Mirroring the Changes

Other findings, such as the increase in the outsourcing of PC management and user support, reflect the changing nature of the industry. “Unlike many years ago, where the IT or IS function in the company managed all the computer needs, now a lot of the computing is managed by end users,” he says. “These people are not IT people…and they need support in the form of a help desk or information center. Some companies don’t want the hassle of taking care of all these problems, so they outsource end user computing.”

Another change is in the size of the company using outsourcing.

“We’ve found that it doesn’t matter whether you’re a big or small company. Everyone seems to be outsourcing about the same,” says Grover. “Many years ago, it was really smaller companies that didn’t have the facilities or access to expensive technology that were doing the outsourcing. Now a lot of big companies are essentially outsourcing their entire IS group. Size is becoming increasingly irrelevant.”

Strategy, the way a company orients itself, appears to be more of a factor, according to Grover. Companies that are aggressive in the marketplace tend to respond more readily to problems in their IT environment and consider outsourcing as an option in dealing with problems in information quality.

“The only exception,” says Grover, “is systems operation, which is pursued regardless of the firm’s strategy.”

Contract Problems

The study also revealed problems commonly occurring in this changing environment. Some of them center on contracts, including the basic structure of the agreements. Contracts, says Grover, can be defined as either tight or loose. Tight contracts are loaded with ‘legalese’ and leave little wiggle room. Loose contracts, on the other hand, include enough flexibility to accommodate change, which is an important issue with the rapid pace of change in technology.

Any decision on contract structure should reflect the degree of uncertainty in the customer’s environment, according to Grover. Companies in environments where things are changing extremely fast and the future cannot be predicted should sign loose contracts. Companies in relatively structured environments where nothing is likely to change over a period of a few years can sign tight contracts.

“The problems come when companies sign tight contracts in environments of high uncertainty, or they sign loose contracts in environments of low uncertainty,” says Grover.

If a company has a tight contract and their situation changes, the vendor can refuse to do anything that is not spelled out in the contract. Conversely, the client can take advantage of a loose contract covering an environment of low uncertainty by prodding vendors to deliver services they hadn’t expected to provide.

Another problem revealed in the study is the danger of hidden clauses. Those ‘small print’ clauses can include, among other things, the vendor’s right to subcontract some of the services to a third party. That, says Grover, leaves the customer in the position of trying to manage a contract that is far removed from the original agreement.

“One strong recommendation is that hidden clauses be read very carefully, because they could be a source of major problems,” he says.

Business Problems

Business problems also must be considered. One such set of problems, according to Grover, is where business decisions and outsourcing decisions are made in isolation. That could lead to conflicting situations, he says. For example, in one company studied, the IT group was considering outsourcing their entire payroll IT structure while the business people, in their strategic planning, had decided to outsource the payroll function. “Clearly both of those could not occur simultaneously,” says Grover. “You have to have the business people and the technology people interact and talk with one another, so that you don’t have problems where the outsourcing is not consistent with what the business is trying to do.”

He also notes that some companies are overlooking an advantage by not allowing their internal IS groups to compete with external vendors on the outsourcing project. He emphasizes that in such situations the internal groups must be allowed to compete on an even footing without being constrained in the way they have to provide service to users.

“We found that a lot of successful outsourcing takes place where there’s a competitive environment and vendors outside the company and the IS group inside the company all compete for the contract,” Grover says. “You may find in many cases that the internal group provides a better arrangement. After all, they are within the company, and they understand the company better.”

Whoever wins the contract, Grover stresses that companies should not underestimate the importance of contract management. Besides the legal aspects of the agreement, the management team should take responsibility for managing the nuances of the contract. They also should keep up with the latest technology, to make sure the vendor is performing as expected. The management team, he says, should include technical people and business people, as well as attorneys.

Defining ‘Strategic’

Finally, one problem revealed is basic to the whole question of outsourcing. While ‘gurus’ of outsourcing have recommended that strategic technology should be kept in-house, Grover says companies have difficulty determining exactly what is strategic and what isn’t.

“What we found is a lot of companies have very erroneous definitions of what is strategic,” says Grover. “Some companies consider strategic systems to be the systems that are very expensive; some companies consider them to be systems that are very complex. Strategic is neither one of those. The way we see strategic is how important it is to the business, how it helps you compete in the marketplace.”

Lessons from the Outsourcing Primer:

  • A company’s strategy is becoming more important than its size in making the decision to outsource.
  • Contract structure should be aligned with the level of uncertainty in a customer’s environment, i.e. tight contracts in low uncertainty environments and loose contracts where the uncertainty level is high.
  • Outsourcing decisions should not be made in isolation; both IT and business people should be involved to ensure there are no conflicts with business strategy.
  • Allowing internal IT groups to bid against external providers can be beneficial.
  • A ‘strategic’ system helps a business compete in the marketplace. Cost and complexity are not elements in the definition.

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