Since Professor Wendy Currie of Brunel University in London, began researching information technology (IT) outsourcing in the early 1990s, the market has changed quite a bit. At that time the developing vendor market was growing, but still in the adolescent phase. Now it is well on its way to full maturity. According to Currie’s and Leslie Willcocks’ business guide titled New Strategies in IT Outsourcing, the global outsourcing market was £96 billion in1998, and will reach £151 billion by the year’s end.
The 315-page report that Currie and Willcocks were commissioned to do is unlike other reports that have been done in the past. Currie, professor of strategic information systems at Brunel, said much of the earlier research tended to focus on very large outsourcing deals. What she and Willcocks wanted to do was to recognize that there are a variety of outsourcing forms that include total outsourcing, selective sourcing, joint venture sourcing and even insourcing. With that in mind the research was intended to elicit information on peoples’ experiences of outsourcing over a period of time. CIOs and IT directors in the United States and Europe were interviewed at companies in vertical markets that included aerospace, banking, insurance and public (state) owned organizations. This enabled a comparative analysis of the data. The research has produced some interesting findings about the policies, practices and processes of outsourcing.
Why Companies Outsource: Then and Now
The growing market has brought new insights and many changes into the last year of a decade that has experienced the maturation of outsourcing. One significant change is the very reason why businesses consider outsourcing, Currie says. Historically, early outsourcing deals were premised upon cost reduction. Economic recession forced many companies to use outsourcing in order to get a cash infusion and possibly save the company from going under. Companies could sell their IT assets and transfer staff to the vendor and get immediate cash. But a more strategic approach is usually the case now. Many companies have learned from their mistakes. Outsourcing deals are far more than a quick fix; they are inserted into a company’s overall plans for much more substantial reasons.
“More recently there is a trend towards joint risk and reward deals and there is a greater emphasis on looking at value-added sourcing,” Currie says. “So the emphasis has changed slightly in terms of rationale.”
The late 1990s have also brought about a better understanding of outsourcing arrangements. This is not to say that those involved aren’t still learning from successes and failures, but more care is being taken to assure lasting benefits. One way is by bringing in experts during negotiations to help with contract clarification. And outsourcing consultants and lawyers are playing an important role in helping customers get better service at competitive prices.
“In the early days, many client companies were signing contracts with vendors without a complete understanding of just what they were getting into because there wasn’t much basis for comparison. And as a result, some companies came undone,” Currie says. “What they are doing now is hiring their own team of lawyers and experts and obviously that is very sensible. These experts can negotiate favorable terms for outsourcing contracts and also provide ongoing support.”
Outsourcing Too Much
Many companies were very uneasy about the idea of outsourcing early in the decade, but Currie says that companies may be outsourcing more than they should now. One of the key dangers Currie points to, is that companies sometimes outsource core competencies — often without realizing it. Companies need to recognize what their core skills are and retain them in house. Allocating too much responsibility allows the vendor to take total control.
Currie says that many IT functions can be outsourced, like data centers, mainframes and some systems development work, for example. But she doesn’t advocate outsourcing strategy, innovation and IT architectures; all probably should remain in-house. “If a company outsources its strategy, innovation and architecture then obviously the vendor has quite a stronghold in terms of that company’s IT, and that can be dangerous,” she says. “If a company does outsource the systems development and architecture it would be wise to form a joint venture — a partnership where there are joint risks and rewards. Client companies should remember that vendors are also entering vertical markets, so they could become competitors over time!”
The Challenges of Total Outsourcing
Recently Currie has found some interesting facts regarding some of the larger outsourcing vendors like EDS, CSC, Andersen and IBM. Large companies like these continue to expand their business by making inroads into vertical markets. Large vendors are buying up communications businesses, software companies, etc. to add to their portfolio. Also, systems houses and hardware vendors are moving into service integration, IT consultancy, knowledge management and business process outsourcing.
“I think the vendors are trying their hardest to offer a much wider portfolio than they did in the past,” she says. “Because of this we are seeing the mega-deals getting bigger and bigger and a move by many customers towards total outsourcing deals, but there are dangers in this.”
Currie’s and Willcocks’ report states that total outsourcing deals continue to be the most difficult to manage. “Client companies should not overlook the management costs in such large-scale outsourcing deals”, Currie says. The dissatisfaction with total outsourcing is often high, but it is difficult for companies to terminate large contracts, as the cost of doing so is prohibitive. “Vendors build in high switching costs”, she says. Total outsourcing should always be done on a joint risk-reward basis, and never on a fee-for-service (time and materials) contract. Using experts to get the proper contract is extremely important in these cases, along with a strong management team. It may also be a good idea to include renegotiation stages in the original contract of big deals.
The concerns of total outsourcing have reached the National Audit Office (NAO) of the United Kingdom, according to the report. It is estimated that EDS receives 25 percent of every pound spent on IT services by the UK government. This has caused some to criticize the prospect of a monopoly situation emerging, if it has not already done so. Because of the large-scale nature of the government’s use of external vendors like EDS, it is now virtually impossible for central and local government to rebuild an internal IT infrastructure in some cases, even if the NAO deems it necessary to revert back to in-house control.
“I don’t think total outsourcing is a problem in all cases though,” she says. “As long as companies work well with their supplier and ensure that the supplier is going to put their best people on the contract it can work OK. But certainly the most popular and safest types of outsourcing seems to be selective or joint venture sourcing, where companies are able to retain control.”
Currie feels that overall, outsourcing has produced many advantages to companies, and their experiences in the last decade have given them opportunities to re-negotiate more lucrative contracts. Along with the other widely-publicized benefits that companies achieve through outsourcing, it can also help companies focus on exactly what they are spending on IT overall, she says.
“It is clear that not all IT-related work needs to be kept in-house, but there still remain some situations where companies are paying too much for some IT services which are externally sourced,” she says. “One key advantage of outsourcing is that it brings in new blood and expertise into a company. And one thing is certain, outsourcing has helped change the structure of many vertical markets, and will continue to do so in markets such as financial services, leisure and healthcare.”
The report New Strategies in IT Outsourcing is available at www.business-intellegence.uk.ac. Currie has a new book titled Re-thinking Management Information Systems (co-edited by Bob Galliers) which is published by Oxford University Press. She is also a consultant in the field of information systems.
Lessons From the Outsourcing Primer
- More companies are using outsourcing strategically as opposed to using it for a quick fix to financial problems.
- The outsourcing industry is moving towards more joint risk and reward contracts.
- Companies should recognize what their core competencies are and retain them in-house.
- Total outsourcing continue to pose the highest risk of all forms of outsourcing.
- Overall, outsourcing has changed the structure of many vertical markets and has produced benefits as well as pitfalls in the business world.