Outsourcing 2.0
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Big-bang IT service contracts are being usurped by a more flexible model of utility outsourcing
In another hyperactive year for the global outsourcing industry, big-money contracts abounded. News agency Reuters signed a £500 million multi-year deal with Fujitsu Services, while the AA terminated its £50 million deal with IBM three and a half years early.
New locations emerged as hotspots for future offshore hubs: Malaysia, South Africa, Romania and the Philippines are now included in the top ten most popular outsourcing destinations, according to research by recruitment consultant Harvey Nash. Meanwhile, some well-placed acquisitions among Indian and European IT service providers began the slow-burning process of consolidation.
The future of outsourcing
Outsourcing providers can look forward to more of the same. Information Age’s Effective IT Survey 2008 found that 40% of IT budgets are set to grow, while in the aforementioned Harvey Nash survey half of the IT directors charged with managing these expanded budgets plan to spend at least 10% on outsourced services.
The good news is that this money is unlikely to be spent on outsourcing the whole IT department. The Effective IT Survey 2008 found this strategy extremely unpopular, coming in last place overall in the effectiveness rankings. This puts the strategy even lower than in the 2007 poll, and only 5% plan to outsource the IT department within the next 12 months.
Probably because more sophisticated and flexible outsourcing models are rapidly emerging, the strategy of shipping IT departments offshore seems destined to fail. According to advisory house Gartner, outsourcing’s future is in the utility delivery model, where shared services are delivered and paid for on demand. These services, write Gartner analysts Claudio Da Rold and William Maurer, signal a “tipping point” that will lead to “an accelerated period of change and innovation” in IT outsourcing.
Despite being regarded by Effective IT Survey respondents as a minority practice, according to Gartner the outsourcing model (years ago lauded by IT industry maverick Nicholas Carr as “inevitable”) is set to become a workable reality during the next two years due to widespread user acceptance of shared, standardised services.
The rise of on-demand utility services can already be seen in the currently popular off-premise software-as-a-service model (see article ‘On-demand economics’) and in more traditional IT infrastructure utility (IU) services, for example the on-demand provision of storage space or processing power.
These will soon be accompanied by new ‘IU-in-the-cloud‘ services provided by Google and online retailer Amazon (which already delivers storage as a service), and other key models including what Gartner dubs business process utility (BPU) offerings. In BPU, service providers will attempt to leverage economies of scale by offering traditional BPO services (which are moving rapidly towards mass customisation) on a utility basis to multiple clients.
Gartner’s May 2007 poll shows growing uptake for such utility services. A total of 27% of 120 client organisations are now using some form of IU and 89% expect to be doing so within two years. Uptake of BPU services has been driven in Europe by major regulation, such as the Markets in Financial Instruments Directive (MiFID).
The utility model has persuasive benefits. It allows users to ‘pick and mix’ a range of services from different suppliers, avoiding inscrutable or rigid big-bang deals that lead to disappointments – not to mention lawsuits. For organisations to effectively exploit these new models however, they will have to alter their procurement frameworks and sourcing strategies.
Further reading
Back to the Effective IT 2008 Report contents page
BPO and Offshoring - Is it still good value?
Out of India Who's best placed to exploit the world's biggest pool of low-cost, highly-skilled IT service labour?
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