Outsourcing changes are usually linked to developments in the computer industry. In the past, mainframe operations have been the dominant way in which a company runs its information technology (IT). So consequently, outsourcing has drifted towards farming out entire computer centers. With more decentralized operations, such as LANs and WANs, the possibilities of selective outsourcing has become reality, opening the door to multiple vendors and the outsourcing of different environments. This leads to the question of whether to choose best-in-class providers or single integrators.
Best-in-class means that an organization chooses the best vendor for each separate area of IT. It is, of course, possible for a vendor to be leading in more than one area. Single integrator means that a single vendor is chosen for all outsourcing business. There are many advantages and disadvantages to both.
The main disadvantage of best-in-class is the complexity of managing the interfaces. Interfaces can be between processes, procedures, systems, applications and organizations. Interfaces are a complex matter and an organization will need people who are competent in managing them. A company's own IT department must be able to integrate the systems, applications, etc.
Another disadvantage is the diffused responsibilities between vendors, especially of the aforementioned interfaces. When problems or emergencies arise, it may be difficult to define who is responsible, and the vendors may try to shift their responsibility towards the other parties.
The last disadvantage is that the focus will be more on technical matters rather than on business matters. A company is more likely to outsource systems and application development then to outsource business processes.
The principal advantage is obvious. A company is working with the best! The vendor that is chosen is leading in its area, so it will be supplied with state-of-the-art solutions.
Another advantage is that a company isn't dependent on a single vendor. It is less likely that a single vendor will have a strong grip on the organization. This means that the business has to set up its own IT-steering committee or policy board. Which leads to another advantage. The company is forced to keep its IT knowledge in-house. Not being dependent on a single vendor is only a relative advantage since the company is dependent on the outsourcing deal as a whole.
Having competition between vendors is also an advantage. Each vendor has to prove it is best-in-class. And more importantly, that it stays best-in-class. The different competitors will be constantly monitoring each other and will expect quality from the other vendors.
The final advantage is the flexibility. Because of a variety of smaller contracts, it will be easier to switch form one vendor to another.
The first and principal disadvantage of a single integrator is the dependency on the vendor, also called a vendor lock-in. This may lead to losing control to the vendor. In the worst-case scenario, a company's policy and needs will be dictated by the vendor.
Because of the complexity of IT environments, it is increasingly difficult for a company to be a specialist in all different areas. This means when a company is working with a single integrator, there will often be areas in which the vendor will be second (or less) best. If these are the areas an organization is good in it will make a perfect fit. However this is often not the case.
Of course, there are advantages. The main advantage is that it reduces complexity. The company is the customer and its main concern is to define and check the service levels, stated in the Service Level Agreements. So managing the interfaces is less complex.
The second advantage is cost-driven. The economies of scale are greater than with best-in-class. Computer resources can be shared with other customers; integration is already in place and often procedures and processes are more efficient and effective. This advantage could also exist for a best-in-class solution but plays a less critical role.
The final advantage outlines the strategic partnership. It is more likely to achieve a strategic partnership with a single integrator, since a business works closely with the vendor and they both have the same goals. A company is able to talk about the entire business chain, from a strategic level down to the operations.
Overcoming the Disadvantages
First, it is important to remember that the disadvantages (and advantages) do not have the same weight within each organization. Management has to decide for itself, which points are important and which are not.
The disadvantages (and advantages) also differ in relation to choices of other approaches to outsourcing. For example, will the organization or the vendor own the hardware and will the personnel be on the customer's payroll or the vendor's?
The disadvantages can be overcome or at least minimised by identifying them, realizing they exist and managing them effectively.
Looking at 'best-in-class', the best way to overcome the disadvantages is simply to build a strong team that manages the interfaces. To manage the interfaces, a company must have a clear overview of them. There are four types.
- Between processes and procedures. The processes of the different vendors (and also an organization) need to be aligned. The vendors will probably resist and want to use their own (internally proven) processes and procedures. An example is the alignment of the change management process, whereby a change at one vendor could have an impact on another vendor. The IT Infrastructure Library (ITIL) and the Capability Maturity Model (CMM) provide concepts to enable the alignment of the IT-processes.
- Between systems. Systems should be compatible. Different vendors may use different systems.
- Between applications. Applications developed by different vendors may be unable to communicate or unable to run on certain hardware.
- Between organizations. Organizations differ in more than one way. In the case of 'best-in-class', several organizations must work together. In certain areas they will have to compromise. Where organizational cultures differ, managing and achieving compromises may be very challenging.
No Hard Rules
There are no golden rules. Much depends on the organization and its environment. In both cases, the organizations must have in-house IT knowledge. On one hand, so as not to be controlled by the vendor, on the other to manage the interfaces. Technical knowledge will be more important when working with different 'best-in-class' vendors. If a company desires outsourcing at a strategic level (including business process outsourcing), it is likely to be better off with a single integrator.
It is not always easy to decide who is 'best-in-class'. Best-in-class can mean technical but also cultural or procedural. An organization will have to clarify what 'best-in-class' means to it.
Finally, it is possible to combine both ways. In this case, a company will need to work with consortia, or different vendors who work together to provide you with solutions. The consortia can consist of 'best-in-class' vendors that are also able to handle strategic (business) matters. In this case, competitors may be colleagues as well. This may differ from contract to contract and between clients.
The author Eelko van Leeuwen is consultant and works at Quint Wellington Redwood in Amsterdam. Quint's primary activity is the improvement of the performance of ICT organisations and ICT services of the Top 300 businesses in the Netherlands, Great Britain, Belgium, Luxembourg, Switzerland, Germany and Austria.
The areas in which Quint advises are: Outsourcing mediation; Service management (ITIL/IPW™); Development (capability maturity model); Quality (EFQM, INK, ISO, TQM); Business IT alignment and architecture; Information economics. Quint provides advice, training, project management, change management and interim management services in these