"ITO is renewed again. We're seeing an up-tick in the buzz around ITO compared to three years ago," says Phil Smith, Vice President of Portfolio Management for Global Outsourcing and Infrastructure Services at Unisys. In fact, he says industries like financial services--which have "been to the well for quite a while"--are coming back and looking at ITO again, but in a different way. "Buyers are looking at outsourcing more objectively now than in the last couple of years. People are realizing that outsourcing really means best practice," explains Smith.
What's happening to cause the renewed interest in ITO? Since it has long been considered as having matured (certainly over BPO), do buyers need to take a step back and look at some new factors when it comes to ITO decision-making? We asked world-class, leading-edge companies for their advice on what buyers should be aware of for outsourcing decisions in 2006 and three to five years down the road. Here are the insights they shared.
The decision to buy ITO services has shifted from the cost-oriented, tactical approach of the past few years. According to Marty Sunde, Client Services Organization Leader at Acxiom, buyers are now trying to build strategic frameworks and position themselves for growth. "It's not just buying for this year and what's the minimum we can buy in order to continue to move on. It's more of: how are we going to align strategic goals and capabilities to grow and leverage the top line."
At Getronics, Vice President of Marketing and Strategy Paul Jameson, agrees there has been a major shift. "Procurement's interest in driving costs out--almost under any circumstance--has shifted to a focus on productivity." Over the past few years, business owners often were not involved in structuring the outsourcing arrangements, and procurement teams drove costs down as hard as they could. The impact on productivity and quality was often not foreseen by the buyer, and often was dramatic--moving, for example, from a four-hour break/fix service-level agreement to a four-day fix, in order to get the cheapest scenario. "But downtime affects the bottom line. Now there is a big trend of buyers looking at the total impact to operations," declares Jameson.
But some things have not changed, Sunde says. CIOs, as always, are still concerned about availability of their infrastructure and applications and the need to ensure end users or customers get what they need to run the business. "They also ask what we can do to make sure systems are so predictable that availability never becomes an issue," states Sunde.
Both men add that buyers now require that suppliers proactively introduce recommendations and suggestions on process improvements that will improve overall productivity. "It's no longer good enough," says Jameson, "to be an operational outsourcer who just responds; suppliers need to be an integral part of the entire process." This requirement is especially prevalent in enterprises where the clients interface directly with their customers. He adds that this focus sometimes now fills ten pages of an RFP, where it was seldom mentioned just a couple of years ago.
There is also a trend--among both buyers and service providers--of making an effort to prove the relevance of an outsourcing arrangement, its impact on the buyer's business, and how it's necessary to the company. Smith of Unisys points out that this goes hand-in-hand with a trend of service-level agreements starting to focus more on measuring the critical impacts to prove relevance. For example, rather than just measuring network uptime, the parties need to measure impacts such as employee or customer satisfaction or increased market share--the outcomes of having high network availability.
"If you can connect a network or data center to the bigger value, making it relevant to the business, then the buyer will continue to fund it and pay attention to it," explains Smith.
Every one of our interviewed experts ranks the increase in multi-sourced environments as one of the top two trends in ITO. Buyers want the best service they can get for the best price and no longer want someone who dabbles in 50 things rather than being an expert in one or two things. It's too risky and costly. With multisourcing, the client gets best-of-breed solutions that are integrated and synergistic . . . that is, if all the suppliers play well together in the sandbox. "Suppliers have to be willing to bend," advised Jameson of Getronics.
But it's a tough challenge to manage such an environment, and buyers should not underestimate the cost (in time, effort, and dollars) of governing it. It requires much deeper management skills and a lot more oversight. It also requires formal Operating Level Agreements (OLAs) among the providers in the environment. An OLA identifies not only the clients' needs and requirements but also such factors as the providers' roles of responsibility and their areas of overlap (and expected behaviors in those areas). It may also require a single reporting environment, where each provider must be willing to submit reports that look like they are all a single entity.
Another clear ITO trend for 2006 is an increased emphasis on security and privacy. Acxiom's Sunde discloses the number two concern at the CIO level (after availability of IT) is security-related issues. "To a large degree, CIOs are playing thought-leading roles in their companies around these topics, and they're very interested in knowing how to stay ahead in these areas," he says.
Security and privacy are cost and risk areas of major impact to a company, and buyers are turning to outsourcers to help them figure out how to deal with both."Three years ago, security would not have been a page in a 100-page RFP; today, it's often a whole section," says Jameson at Getronics.
Buyers are already demonstrating that they're inclined to want to align with suppliers that have already demonstrated a strong expertise and commitment to invest in security tools and processes over time.
The key in the future will center around bringing into an outsourcing relationship the right level of innovation in infrastructure and business processes, upon which companies will compete. Our experts discussed three major technology innovations.
Grid technology. The killer technology to look at in 2006 will be grid technology, according to Acxiom, which has implemented it internally for its clients. Sunde says grid technology "can have a double-digit cost-reduction impact and a 10X or greater impact on capacity (volume and speed) over the next five years." It presents the opportunity to dramatically improve the value derived from IT infrastructures. At this point in time, the technology is still evolving; therefore, early adopters still have some risks but reap the greatest benefits in grid-enabling technologies.
Customer data. Sunde says too many buyers face the classic situation of being data rich but insight starved. "Currently in the top three items on the CIO agenda, and probably number one for the marketing folks, is eliminating the bottlenecks that are still causing them to not harvest more out of the transaction-based enterprise systems they put in place over the last decade. They know there is leverage in these assets that is still going untapped," he explains.
An emerging trend is implementation of a customer data integration layer in IT infrastructure. Right now, buyers are challenging suppliers about how to organize and consolidate their customer information in a way that allows the buyers to analyze it in a more organized, more meaningful, more predictable way.
Utility computing. Mike Jones, President and CEO of (i)Structure (currently pending acquisition by InfoCrossing), believes one area where we'll see technology innovation being put to work is in models that accommodate the needs of small-and mid-sized buyers (SMBs). The value proposition gets stronger in this arena, as companies are struggling to manage all the technology innovation that is being thrown at them.
"Not only is the amount of change increasing, but the rate of change is accelerating. How are small and mid-sized companies going to keep up with and master that rate of change?" asks Jones. The answer is outsourcing. Mid-sized companies are looking for ways to start offloading pieces of their IT infrastructure.
As a result, the number of discrete services being offered in ITO is increasing. And there are more suppliers coming up from the bottom that are specializing in those discrete services (such as Exchange, VoIP (voice over Internet protocol), or storage). Some of the suppliers provide their own intellectual property; others want service providers like Acxiom to provide the services using the supplier's intellectual property.
The SMBs' requirement for cost reductions is causing some suppliers to build more technology infrastructures that are more sharable among multiple tenants--known as "virtual computing," "utility computing," or "utility-based pricing model." Yes, people have been talking about utility computing for a couple of years, but the applications and infrastructures were not designed to facilitate it. Jones says (i)Structure's back-end storage environments are now multi-tenant. He predicts most IT outsourcers will soon be moving to more highly-architected environments where they can do more sharing.
The promise of virtual or utility computing is not fully realized yet in most areas. But there are examples out there--Unisys has had several successes with business process utilities and signed a few more in 2005.
"Clearly we have seen where technologies have been applied to great benefit, whether it's using VM-ware for server consolidation or blade server technology for significantly reducing the compute footprint," explains Jimmy Harris, Managing Director, Infrastructure Outsourcing at Accenture. Blade servers and carrier-grade switches are showing promise in this area and add to the value proposition for clients.
Still, the notion that a client's entire IT estate can be flipped into a completely standard utility computing environment is difficult. Harris predicts it will be four or five years before we see the full promise of utility computing fully implemented in enterprises. People are testing it today, but they need a migration path to it.
Chuck Pol, Americas President at BT, says transformation is now becoming a key driver to business growth and a key mindset to structuring outsourcing arrangements.
Donny Cross, Vice President of Solution Architecture at ACS agrees and says clients are including transformation as a very specific requirement. "They want to see a long-term transformation plan, including metrics to track to the milestones of the plan," he says. He predicts transformation will become a deliverable in deals signed in 2006.
ACS acknowledges it is seeing more buyer requirements for providers to get involved in some of the business objectives along with the line of business executives and understand their objectives so they can more effectively deliver a transformed environment to the buyer. Applications rationalization, especially for acquisitive enterprises, is a key component of transformation.
Pol at BT points to the increase in buyers' use of outsourcing advisory firms in the last twelve months. Even though there is a move to embrace open standards, the focus is now on strategies around business drivers and transformation, extending outsourcing across the entire value network.
"Both sides, of course, are trying to force their own priorities and protect their own interests during the RFP and negotiation process," says Pol, "but both really need the deal to work." Advisors know how to do this and also bring an objective viewpoint. And they are key in assisting with risk mitigation.
They are also experts at determining the value proposition of an outsourcing arrangement. Don Richards, Managing Director, Application Outsourcing at Accenture, states many transactions in 2006, especially with SMBs, will be focused on total cost of ownership and how to get more value from the investments in IT.
Outsourcing is now an imperative for success in enterprises, says Pol of BT. At the same time, we're facing an ever-changing world in IT. The Rx for the challenge is to choose an outsourcing provider that can take the buyer's business to tomorrow. Choose an outsourcing partner with the idea that five years from now your business will be better off because you have a sourcing partner that can bring the kind of innovation you are going to need, not one that just maintains the past.