Computers and the intricate maze of wires that connect them are a part of the dÈcor of most organizations. The information that circulates through these advanced systems is the lifeblood of any business. Endless hours of input-information could disappear in an instant if an organization’s computers are improperly managed, and a system crash can be equivalent to cardiac arrest. The competitive advantage gained through the use of computers could instantly disappear if a crash was to occur, and recovery costs could reach into the millions of dollars. And what becomes of the computers that line the desks? They become nothing more than very expensive paperweights.
So who does a company trust to manage these systems and keep this important information pumping? In 1989, according to Time magazine, Eastman Kodak was the first company of its size to turn over its computers to an outside organization. It was big news. Consider the fact that on Kodak’s manufacturing complex in Rochester, New York, the organization has its own fire house and manned fire trucks. But self-sufficiency comes to a halt when it comes to the business’s computer systems. By selling their mainframes to IBM and allowing Big Blue to manage their data processing, it permits the computer professionals to do the computer processing. Before this move, Kodak looked at their computer system as a cost center, with the help of IBM it now looks at information technology (IT) as a profit center.
Throughout the 1990s, the market trend for most substantially sized organizations has been to move towards outsourcing IT, rather than keep it in house, says Leslie Willcocks of the Oxford Institute of Information Management in London. “I think more and more organizations are realizing that there are things the maturing IT services market can do for them that they don’t necessarily want to do in-house, or can’t afford to do in-house,” Willcocks says. “Based on our research, by the year 2002, most large organizations will be outsourcing 25 to 30 percent of their IT budget.”
According to research done by Willcocks and Mary C. Lacity, associate professor of management systems at the University of Missouri, the annual growth of IT outsourcing between 1992 and 1998 has been 15 to 20 percent. And Willcocks projects the global market revenues for IT outsourcing will grow from $9 billion in 1990 to $121 billion by the year 2001.
Being Selective When Choosing Vendors
Willcocks’ accumulating evidence is that most companies that outsource their IT choose selective outsourcing, which constitutes 15 to 20 percent of their IT Budget. The study shows that 82 percent of United States’ companies choose selective outsourcing and in the United Kingdom, the other leading market, 75 percent choose selective outsourcing.
Total IT outsourcing, which constitutes 80 percent or more of total IT budget, is much less common, Willcocks says. In the U.S. only 8 percent of companies have gone the total-outsourcing route and in the U.K. only 2 percent.
The numbers for total IT outsourcing are low for a good reason; they are very risky deals. Data collected from 29 of the 120 plus largest total-outsourcing deals in the world shows a 35 percent failure rate, Willcocks says. Overall, according to Willcocks, selective outsourcing seems to be the most affective approach to outsourcing and is why it is done most often.
“If you keep more in-house capability you inherently maintain some understanding of your technology and control of your IT destiny,” he says. “If an organization chooses total outsourcing those abilities are eroded over time.”
Other than choosing selective outsourcing, there are several other key areas where Willcocks’ research shows company satisfaction with IT outsourcing. First, most deals have short-term contracts (four years or less in length). Second, respondents generally target infrastructure activities when outsourcing IT, which generally constitutes mainframe operations, PC support, helpdesks, network management, midrange operations and disaster recovery; and they tend not to be in the areas of IT management and applications. Another key is that organizations use multiple suppliers, which Willcocks calls using the “best of breed” and gives several reasons for its effectiveness.
“First, you put less monopoly power in the hands of a single supplier, and you can switch out if things go badly,” he says. “We found several examples of total outsourcing contracts where people were very unhappy with what they were getting, but the cost to switch out was so high that it was better to stay with the devil you knew than to deal with the added problem of switching.”
Another benefit of having multiple suppliers is that you are appointing a vendor that is world class at doing a specific task. No vendors, including the major ones, are very good at everything, he points out.
But there are downsides to multiple vendors as well. There are, of course, higher management overhead costs, and a company may have to play referee between vendors. “Often vendors won’t share best practices amongst each other because they are potential competitors for future business at the organization and for other outside contracts,” he says. “So there can be a certain amount of friction between vendors.”
Willcocks cautions that, in any IT deal, one shouldn’t expect too much from the vendor. A client has to contribute to the working relationship with the vendor, and must continue to maintain a working knowledge of IT to have a successful arrangement. “Passing the task off blindly is not a good idea,” he says.
If you want to read more research about IT outsourcing read Willcocks and Lacity’s article that will be made public in April through Oxford University. Willcocks has also authored and co-authored several books including Computerizing Work (1987), Rediscovering Public Services Management (1992), Information Management (1994) and A Business Guide to IT Outsourcing (1994). He is editor and chief of the Journal of Information Technology and has published numerous academic papers in journals such as the Harvard Business Review, Journal of Management Studies, Journal of Strategic Information Systems and Long Range Planning. He is also a consultant for several major corporations and government institutes as well as a fellow in information management and university lecturer in management studies at Oxford University.
Lessons from the Outsourcing Primer:
- Willcock’s research shows that selective outsourcing decisions achieve more success than total outsourcing decisions.
- Executives and IT managers who make decisions together are more successful than those who act independently.
- Short-term contracts (4 years or less) are much more successful than long-term contracts (7 years or more).
- A successful organization must know the marketplace and understand the weaknesses and strengths of IT vendors.
- An organization must have the ability to contract over time in ways that ensure they are getting what you think you agreed to.
- An organization must have the ability to post-contract manage across the lifetime of a deal in a way that will build and secure the organization’s IT destiny.