Cost savings historically have been the biggest enticement to outsource. Vendors ran the numbers and showed their prospects the math: outsourcing could save them significant dollars.
Today, cost savings have fallen to the bottom of the list of why companies outsource, according to Cynthia Doyle, an analyst with IDC, an IT market research firm in Framingham, Massachusetts. The Internet has turned the list of answers to the question “Why outsource?” on its head.
Technology is the main driver changing the face of outsourcing. “Technology is the key to survival in the new world order,” says Doyle. Gone are the days when the board of directors agonized over handing over a process to an outsourcing provider. Today, she reports outsourcing is a given in most boardrooms because companies can’t keep up with the mach speed rate of change in the IT world by themselves. Corporate America “needs outside help,” she says.
Doyle, who covers the landscape of the large IS outsourcing providers like IBM Global Services and EDS, says traditional brick and mortar companies have age-old distribution channels that typically don’t involve technology. Now they see that their competition is doing business on the Web and they want an Internet presence and ecommerce abilities, too. Unfortunately, they rarely have the internal resources to make this 180 degree change themselves. Outsourcing becomes the only solution, creating a land office business for vendors.
The Speed of Technological Change
The speed of change is intensifying the situation. Technological change today moves at breakneck speed. Corporations don’t have the time to train their staffs every time their application provider issues an upgrade. They certainly don’t have the time to hire a staff with the world whizzing by at such a fast pace. Companies turn to best of† breed providers to keep track.
The third driver is the changing nature of business competition. “Companies are being pulled in a lot of different directions,” points out Doyle. Their traditional business model is crumbling and they have to adjust to the new economic order. The head honchos don’t want to distracted by other things when their plates are already overflowing. Concentrating on their core processes is more crucial to their success.
The pain is even greater for companies in industries undergoing radical change – either legislative or economic — like health care or energy, according to Doyle. The best way to weather the storm and remain competitive is to outsource. Outsourcing is also an efficient way to keep up with the new government regulations as the industry changes.
The shortage of resources is also playing a role. Outsourcing eliminates the need to attract, hire and retain skilled IT personnel.
San Diego Creates ‘Virtual Government’
Business Process Outsourcing (BPO) providers can be the answer because they can perform the non-core processes more efficiently than the buyer can. BPO providers are adept at applying advanced technology to mundane processes. “Companies can take advantage of the latest technology when they outsource,” she says.
A good example is the County of San Diego, which decided it wanted to create a virtual government to provide greater accessibility to county services. Citizens who don’t have a computer at home can access the county’s Web site at kiosks or at terminals in the libraries.
The county outsourced the project to the Pennant Alliance, which includes Computer Sciences Corporation, Science Applications International Corporation, Lucent and Pacific Bell. “I think this is a great example of an organization outsourcing to access advanced technology and thereby offer innovative services to its customers,” says Doyle.
While outsourcing is changing the architecture of companies, their demands are also redefining the outsourcing world. Today Doyle says companies are looking for partners not providers. Outsourcing as a business model is moving beyond the traditional vendor-buyer duet into the world of strategic partners.
“Companies want a partner who can use technology to solve their current problems and help them create a plan for the future. They want a partner who is cutting edge, who can anticipate what’s happening,” she says. Companies are depending on their outsourcing provider to help them remain in the front of their markets.
The Cost-Benefit Analysis Of Outsourcing
Finally, companies still appreciate cost savings. Until the Internet changed the way the world does business, Doyle says the ability to lower cost was the most significant factor in choosing to outsourcing. Now, cost savings have fallen to the bottom of the list of why companies outsource. “All these other reasons are driving companies to outsource. If they can save money, too, that’s great,” she says.
This new attitude is causing companies to look at outsourcing vendors in a new way. “Companies are not only looking at what they are paying in but also what they are getting out of the relationship. Now buyers are approaching outsourcing using a cost benefit analysis,” the analyst reports.
Lessons from the Outsourcing Primer:
- Cost is no longer the biggest motivation for companies to decide to outsource. Keeping up with technological change is now the major reason.
- Companies can’t keep up with the rapid rate of technological change. So they are turning to BPO providers for help.
- Buyers are looking for vendors who can become their strategic partners, too.
- Buyers are using cost-benefit analysis to determine their relationship with vendors.