Buyers Know Best | Article

Man holding a dollar signThe French have a saying, “The more things change, the more they stay the same.” After studying IT outsourcing for the last 10 years, Mary Lacity and Leslie Wilcocks have found that’s exactly what happened in their world. While the Internet has created a global economy that has radically altered the way companies do business, corporate IT goals “have remained astonishingly the same during the past 40 years,” Lacity says.

What these customers want includes a flexible contract, cost savings and high quality products and services, she says. No matter what people say in public, the executives told the researchers cost was the number one reason they opted to outsource. “People like to say they decided to outsource for strategic reasons. But that’s not true,” says Lacity. Reason number two was the need for improved services.

Lacity, an associate professor of management information services at the University of Missouri in St. Louis, and Wilcocks, a professor of management information systems at Oxford University in England, conducted in-depth case studies for their book. They interviewed nearly 300 executives in 75 organizations across the planet for their new book: Global Information Technology Outsourcing: Search For Business Advantage. (Wiley Chicester, 2000). They approached the outsourcing issue from both the supplier and the customer perspective.

While customer demands have remained constant, IT outsourcing trends have changed, mirroring the underlying shift in IT cost drivers. During the 1960s, many customers could not afford mainframes and sought IT outsourcing through time-sharing. During the 1970s and 1980s, the advent of personal computers drove hardware costs low enough to justify customer ownership and control of IT assets.

ASPs, Today’s Version Of Time Sharing

Then, in the 1990s, IT software costs soared. The global IT skills shortage surfaced. And the pressing need for bandwidth made itself felt. These drivers shifted the economics of IT again, encouraging companies to turn to Application Service Providers (ASP). The IT world has come full circle, returning to a 21st century version of time-sharing.

The authors say the explosion of the Internet has again shifted the underlying economics of IT. “Why house your own software when an ASP can provide it for you over the Internet at a variable price?” Lacity asks rhetorically.

Businesses have discovered a new method of procurement. In the past, customers established relationships with a set of preferred providers. Transactions between the two required fixed network connections for EDI purchasing, invoicing and payment. With the Internet and ASPs, the connections are virtual, allowing customers to bid for their purchases. The authors are watching to see if companies will replace their historic long-term commitments to a few suppliers with transaction-to-transaction bidding over the Web.

A Wise Buyer Is Good For Outsourcing

The authors point out one major change in the last decade of outsourcing: Customers learned from their mistakes. Today they are far wiser. Lacity maintains this buyer sophistication is a boon not a bane to suppliers. “There’s nothing worse than having a customer with unrealistic expectations,” says Lacity.

The professor says suppliers repeatedly told the authors they could predict how the outsourcing relationship would unfold based on the customer’s ability to articulate, negotiate and resolve issues during the contract negotiations. Both sides have learned to try to resolve most of their conflicts during the contract negotiations, activities “best rehearsed before the deal goes ‘live,'” says Lacity.

The duo’s research demonstrates that detailed contracts are a critical factor in a successful outsourcing deal. Spelling everything out “serves to solidify, document and disseminate IT expectations among the stakeholders” says Lacity.

Their book reveals some surprising findings. The companies that enjoyed the most success in their outsourcing endeavors practiced select sourcing. They looked at IT as a portfolio of products and services. They studied each segment carefully, keeping core IT capabilities in house and outsourcing the rest. The “all or none” outsourcing strategy rarely works today. The authors estimate companies will selectively source about 35 percent of their IT budget.

Outsourcing 100 percent of the IT process has led to trouble in the past. Lacity says almost all the faltering outsourcing arrangements the authors studied were caused by outsourcing a core IT function. The study found almost a third of cancelled contracts were brought back in house.

Trends In E-commerce

The trends are different in e-commerce, however. The authors discovered in the beginning companies outsource the technical development of their e-commerce process. Once they implement the system they tend to take control of all further development in house because e-commerce becomes a core business function. After they become proficient in the process, these companies outsource the legacy applications (transaction processing systems built more than 20 years ago) to allow the in house team to focus on new Web based developments. “E-business projects increasingly will not be about just designing and delivering Web sites. They will also involve reengineering infrastructures and business processes,” says Lacity. The authors predict ASPs will move from single application offerings, which is the standard currently, to providing fully integrated, multiple applications. These might include e-commerce, customer relationship management, financial packages, and personal utilities, among others.


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