A New Era for Outsourcing | Article
When the word outsourcing came into common usage 15 or so years ago, this new business practice was usually associated with reducing cost and cutting headcount. Today, companies still look to outsourcing to reduce cost. But the global changes of the last five years have broadened the range of reasons to outsource.
The rise of the Internet has in turn spawned two forces which are driving companies to outsource. They are:
- Highly competitive global markets and
- The rise of e-business.
These two trends are forcing companies to conduct their business differently and expanding the role that outsourcing and alliances play in today’s highly competitive global economy.
In my opinion, here are the reasons a company chooses to outsource today.† Companies outsource for a combination of these reasons.
- To gain access to e-business capacity. Companies that can not do business on the Web realize they must have this ability.
- To make costs predictable and convert from fixed to variable costs. Application Service Providers (ASP) are a good example of permitting outsourcing buyers to convert fixed costs into variable costs.
- To reduce cost. Leverage and economies of scale allow outsourcing providers to do the job more cost effectively.
- To get well-defined and consistent service levels. Companies realize an outsourcing provider that specializes in a process can usually do it better than they can.
- To acquire needed skills and expertise. In today’s market of near full employment, companies can’t find enough people with the skills to do the job.
- To gain access to best practices. Outsourcing providers have experience in many different companies in various industries.† We should expect the providers to have adopted best practices and discarded the weak practices..
- To eliminate up-front capital costs. Outsourcing means that the customer no longer has to invest in capital to acquire hardware and software.
- To reduce the risk of transition to new technology. Companies that have no -commerce experience, for example, can turn to experienced outsourcing suppliers who have done it for other companies.
- Improve career paths for IT staff. † Career paths for IT professionals in non-IT companies are usually limited. The best opportunities are normally with IT firms. IT service providers should be able to attract and retain the best and brightest.
- To focus on their core competencies. Companies today know they have to be the best at what they do to survive the intense competition in the marketplace. They don’t want to be distracted with non-core or contextual processes.
- To share the business risk with another company. This is especially true for companies launching new services or products. They have another firm alongside with depth and breadth of knowledge to advise and assist
Change of Focus to the Web
Today, the focus of outsourcing has changed as well. Ten years ago outsourcing vendors focused mainly on data centers and legacy applications. Today outsourcing zeroes in on the Internet. In the past companies outsourced to get rid of assets; today more and more companies outsource to gain capabilities. Total outsourcing was the norm in the past; today selective outsourcing is more common. Traditional outsourcing centered around IT only. Today, the trend is on business process outsourcing (BPO) and application service providers(ASP)
In my opinion, the ASPs have ushered in a new era in outsourcing. Now companies of all sizes can gain access to outsourcing capability, capacity and coverage . New vehicles like the OutsourcingCenter’s Exchange allow anyone to get assistance with contextual processes through outsourcing, while making it possible for small and medium companies to also gain the advantages of outsourcing.
The new economy is changing the role of the senior IT executive. Today the CIO should not be managing day-to-day operations. Smart companies are outsourcing that and freeing the CIO to become a corporate leader and contribute to the firm’s business strategy. The CIO now has time to focus on two-way alignment of IT and the business strategy by spending less time on tactical management of IT resources. The CIO today is truly “Free to Lead” like at no other time in history.
Even the mood of outsourcing has changed, altered by the pressures of global competition. In the past outsourcing negotiations tended to be more win-lose and adversarial. The buyer negotiated tough to get the cheapest price possible while the supplier wanted to have little or no accountability or liability.
Today we see more examples of both sides recognizing that they need each other and that the long-term quality of the relationship is critical. Realizing that a negative approach is not the way to build a good relationship, both parties see the need to craft a win-win relationship. Buyers have matured, realizing outsourcing is an important component of their business strategy. Service providers have matured, realizing that happy customers mean more business and good references.
Slashed Cycle Times
The Internet has cut cycle times. This has created an investment paradox. In the past the business cycle changed every 10 years. The technology cycle changed every five to seven years. Today the business cycle changes every 12 to 24 months, and the technology cycle ranges from one to three years. This compression has created a tremendous tension. Firms are in a quandary, trying to keep up and compete. Thus, companies are seeing that the assets that enabled in the past may inhibit now.
New and emerging companies, for example, are not owning their own resources; they are not creating their own IT infrastructure or large accounting, finance, human resources and other non-core departments. Instead, these emerging companies are turning to outsourcing and alliances.† The result: increased agility and flexibility.
Lessons from the Outsourcing Primer:
- Cutting cost used to be the primary reason for outsourcing. Today, the Internet and intense global competition have created a host of other reasons to outsource.
- Outsourcing negotiations should not be adversarial. Both parties need† to create a win-win situation.
- When outsourcing frees the CIO from running day-to-day operations, the CIO gains the time to truly contribute to executive strategy.† The CIO becomes “Free to Lead”.
Category: Articles, Cost reduction & avoidance, IT infrastructure & applications
