Difficult business problems require solutions that are based on sound reasonings. The Internet and new economy have so drastically changed the way business is done that today’s top execs must focus on how to change their companies. Change is necessary as technology and markets evolve, despite whether a company is competing successfully or losing market share. Long-range plans keep getting shorter and shorter, and the need for risk management in such an environment is increasingly recognized as a competency.
Most organizations now are a hybrid of some internal departments or divisions and some alliances with outsourcers for various business processes. Why do so many chief executive officers (CEOs) and chief information officers (CIOs) turn to outsourcing as a strategy to achieve their business objectives? Upon what reasoning do they base these decisions? Adam Braunstein, senior research analyst with the Robert Frances Group, whose clients are the top echelon of Fortune companies, says that CEOs and CIOs are “looking for the same set of things, but they are starting from slightly different end points.”
Day after day, CEOs of public companies dodge bullets. They are judged on revenue stream, profitability and stock prices, and they are accountable to the company’s board of directors and all of the shareholders. They get calls when things aren’t going as well as they should. They must handle the myriad of headaches resulting from spin-offs, acquisitions and mergers. When all is said and done, there are three primary reasons that account for CEO decisions to outsource; and financial problems are at the top of the list.
“One of the great things that you can do with outsourcers is reduce the amount of money that you spend to support technology,” explains Braunstein. IT hardware occupies a prominent spot in asset columns on asset sheets. Even more prominent is the bottom-line figure for IT support personnel in an area with high turnover. The cost of recruiting, training and retaining skilled IT workers is prohibitive in an environment where technologies evolve through rapid change. Outsourcing changes the bottom line and ensures high-quality personnel.
When a CEO decides to venture into uncharted territories where the company has never gone before (such as wireless technology), outsourcing is the most effective strategy. It enables the company to dabble in the new territory without shouldering the investment burden of new IT hardware and software, or the personnel skilled in implementing, integrating and maintaining the new technology. Braunstein says often they look to outsource new projects that don’t have the funding. “They want to experiment on the outside a little bit and, if it becomes important, bring it in after a period of time when it can be funded internally.”
CEOs also decide to outsource processes where there is no justification for doing the work internally. “They are more interested in keeping up with their market and their competitors than their own infrastructure,” says Braunstein. Focused on core competencies that differentiate the company from its competitors, CEOs want to free their personnel from non-core processes (such as human resources, help desk, finance and accounting) and move them into more essential areas that benefit the company’s strategic plan.
Outsourcing is sought less often by CEOs of successful private companies because they are not pressured to report to shareholders on a quarterly or semi-annual basis. He notes a trend with startups, especially in one of the new Internet spaces, “facing venture capitalists who now demand profitability in a much shorter time frame than they used to. The CEO of a company that must prove its business model can make money within two years will choose to outsource rather than buy hardware for non-core processes.”
Braunstein sees the CIO position as two different jobs. A CIO is first a type of CEO of the IT department. Return on investment (ROI) is the motivator in decisions. He suggests “The CIO must ensure that the technologies the company employs have a future; will help the company move forward; and are in line with the business goals, user requirements and application requirements.” Today’s CIOs are members of the company’s executive council (along with the board of directors) and must therefore keep their focus in line with the CEO’s aims in improving profitability. The CIO’s second job is the day-to-day operation of the organization’s technologies, ensuring everything does what it is supposed to do. It’s often difficult for CIOs to balance both jobs.
The reasoning behind a CIO’s decision to outsource is based on ROI but centers on technology problems and market drivers. CIOs are tasked with integrating disparate technologies that “don’t talk to each other very well, and that’s tough stuff to do,” Braunstein states. They must decide between writing a lot of intermediary technologies internally — which is extremely costly — or outsourcing to a supplier with expertise in “getting pieces of the puzzle to fit well together.”
RFG’s analyst foresees no changes in the role of CEOs in the future; however, he believes that CIOs will become increasingly business focused. “Technology is finding its way into all of our lives and all of our businesses and is really becoming woven into the fabric of how we do business today.” That will necessitate CIOs becoming strategic advisors as to which technologies can help the company to improve on its core competencies and grow into new areas of business. “I think the C and the O of CIO are going to have additional emphasis placed on them in the coming years,” Braunstein adds.
Lessons from the Outsourcing Primer
- The cost of recruiting, training and retaining skilled IT workers is prohibitive in an environment where technologies evolve through rapid change. Outsourcing changes the bottom line and ensures high-quality personnel.
- Outsourcing enables a company to enter uncharted territory without the investment burden of new IT hardware and software or the personnel skilled in implementing, integrating and maintaining the new technology.
- Outsourcing enables taking on new projects that don’t have the funding.
- Because different technologies sometimes don’t integrate, outsourcing is a cost-effective solution to writing intermediate technologies internally.