Hot source: the rise of outsourcing
With outsourcing activity in EMEA off to its best start to the year since 2010, IA examines the factors behind the growth and how enterprises should approach it to best serve the business
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The general make-up of the IT landscape has changed drastically in recent years. Traditional industry powerhouse like IBM, HP and Dell have found themselves having to significantly retrench during a necessary shift from hardware to services, while outsourcing companies have enjoyed unprecedented growth.
The culprit of this shift is cloud computing. The trend has vastly transformed IT’s role in the enterprise by making it extremely cost-effective to outsource the day-to-day functions that historically occupied most of their time and thus allow them to focus on deploying innovation that will actively position the business for growth.
In the past, technology vendors would go into meetings with CIOs expecting to predominantly cover areas such as cost saving, productivity and efficiency to help them run IT better. Whilst those discussions still take place today, vendors are increasingly growing accustom to talking with CIOs, and even CEOs and line-of-business directors, about how disruptive trends like big data, social and mobile, as well as, of course, cloud, can transform the business.
‘The underlying value proposition for outsourcing is strong and it continues to solve problems for businesses, particularly as it moves up the value chain to provide more strategic solutions and becomes more critical to organisations,’ says John Keppel, partner and president, ISG North Europe.
‘While cost, quality and customer service continue to play a significant role in any conversation around outsourcing, it is the demonstration of an ability to solve wider business issues that is more exciting and relevant.’
Indeed, costs will always be the key driver for outsourcing by significantly reducing the capital investment around infrastructure, as well as the operating expenditure of resources to maintain the day-to-day operations.
It also allows businesses to be more agile and flexible. For example, CIOs are able to scale up or down quicker and easier depending on workloads.
This ties in with another key driver – time to market. When CIOs outsource their IT, they don’t have to build infrastructures from the ground up, so there is a faster set-up time and the business can respond faster to market opportunities.
‘CIOs are also now being asked to do more with less and many times they don’t have the skills to deal with new technologies.
‘At this moment in time, they have never faced so many new technologies all at once; cloud, big data and analytics, mobile apps, user interfaces and virtualisation, and the Internet of Things,’ says Len Padilla, VP product strategy, NTT Europe. ‘By outsourcing these, it frees them to focus on the core of their business.’
Mark Wilsdon, VP Europe, Mindtree, adds: ‘Organisations are looking at being efficient and at focusing on transformational growth beyond IT, so clients are looking at outsourcing as a means of development and transformation in order to find new and innovative ways of doing things.’
With this in mind, the rise of outsourcing is creating a new breed of CIO: one that is skilled in using innovation to drive business transformation, rather than in running day-to-day IT.
‘Large organisations now have multiple CIOs performing a number of different roles,’ Wilsdon says. ‘Going forward, the role of the CIO is going to be split in a number of functions, like innovation, support and development.’
This CIO must also find the right internal talent to work with the outsourcer to work collaboratively on new initiatives and take advantage of their analytics capabilities.
As businesses go digital, value creation becomes more and more dependent on technology capabilities. Technologies such as automation, analytics, collaboration tools and cloud computing are critical for undertaking a wide-scale transformation of business processes.
‘These technologies get organizations away from the “lift and shift” outsourcing model of the past,’ says Liv Sandbaek, group technology office, Accenture Operations. ‘Technology enables greater optimisation in higher value areas like analytical insight and provides innovative capabilities.
‘The cloud offers standardised processes and workflows that improve costs, quality and organisational agility. New technologies like these are becoming critical in delivering results with a higher business value. This means that the CIO, the IT department and the wider business leadership team must all work together.’
In a recent survey, outsourcing clients rated transparency 8.7 out of 10 in importance, but rated the delivery of this from suppliers at only 6.6.
While the market continues to move in favour of outsourcing, suppliers clearly have some work to do in their perceptions around trust.
It is critical that end-users have an on-going dialogue throughout the outsourcing process with their partner, and are comfortable that they fully understand what is happening at every stage of implementation.
However, transparency has different meanings to suppliers and clients, and sometimes clients may still be trying to maintain the control that they had over the in-house function, which clearly is inherently impossible.
‘A lack of mutual understanding around the ensuing cultural shift often exists and the issue is one that needs to be addressed,’ says Keppel.
Padilla suggests: ‘When starting out with an outsourcing project, business leaders need to invest a significant amount of time to scope out and agree what success looks like. This is why transparency is so important, and even more so, trust.’
It goes without saying that a strong relationship between end-user and outsourcer is vital. It is the basis for achieving and assessing the true success of outsourcing in support of the business. The question remains, how can this be achieved?
‘The role of the customer’s CIO function is critical,’ says Mike Pierides, parner, Pillsbury Law. ‘It must act as the interface and glue between the business end-user and the outsourcer.
‘It should be close to the business end-user, through regular interactions, surveys, joint strategic committees etc. And it should also of course be close to the outsourcer, in order to achieve alignment of IT to the end-users’ requirements.’
>See also: Outsourcing: end-of-year review and outlook
CIOs should also control their expectations in order to get the best experience out of an outsourcing contract.
It is important to remember that there is not one single decision that will determine the success of an outsourcing arrangement, so CIOs should expect to make many decisions and over a period of time.
This should involve a constant review and challenge of an outsourcing contract, for services and pricing.
‘Our experience is that if two identical, on paper, outsourcing arrangements are entered into by two similar organisations at roughly the same time,’ Pierides says, ‘the experience of the two CIOs over five years of the arrangements will differ dramatically depending on the extent to which the CIOs engaged with and managed the outsourcing contract.’
An area of importance that will become of increasing importance as organisations continue to outsource multiple contracts is the ability to manage each provider’s performance.
People who manage a multi-vendor ecosystem must have the maturity and skills needed to work in such an environment.
A critical element in supporting such people is the tools that can transparently provide detailed data on operational and strategic performance. This data then enables a degree of openness and trust to be established within an eco-system.
‘Some organisations get their ecosystem partners to participate in internal strategic IT meets in order to understand the strategic and operational imperatives, which the CIO is managing,’ says Ashish Gupta, EVP and head of infrastructure services, EMEA, HCL Technologies.
‘In such an environment, competing suppliers working on common projects and common areas of focus also help drive performance, which enables long term value creation for the client.’
Outsourcing IT has continued to evolve and become more mature and consistent in delivering outcomes that the IT industry needs. Looking forward, it will continue to grow as the pace at which technology, and its role in the enterprise, changes.
Generating these in-house will become more and more difficult for even the largest organisations. As IT starts to become a more strategic tool in a firm’s business model, the nature of outsourcing will evolve.
‘Five-year Excel sheets driving a contract will need to give way to a more strategic partnership-based approach where trust through transparency and a win-win partnership mindset will drive the nature of the relationship,’ Gupta says.
‘Paradoxically, the need for faster, more reliable, lower costs and more innovation will continue to be what drives the context of IT within businesses, and hence outsourcing will need to ensure that it can continue to lead the curve on these parameters for it to remain a potent weapon in a CIO’s arsenal.’
As companies gain experience with back-office outsourcing, they’re adopting more innovative BPO services in areas that directly impact client revenues and customer service.
‘Leading clients will continue to adopt more disruptive business models to break out for new growth,’ Sandbaek says. ‘Outsourcing is a valuable game-changing strategy that can help clients operate their businesses better, generate more revenue and adapt quickly to shifting business directions.’
>See also: Gartner on the rebirth of outsourcing
What the experts say
'By driving company evolution through the use of outsourced specialists, CIOs can develop into the type of business leader that will investigate technology innovations. The employment and hiring of outside specialists can enhance the business and drive competitive advantage, rather than leaving CIOs viewing technology simply as a means to keep the business running.'
- Steve Nice, CTO of Reconnix
'The CIO role is definitely changing. Today it is a role for a person who clearly understands the business objectives and can ensure that the technology services are strategically aligned with those. Business transformation is a significant part of this, as certain parts of the organisation will require dragging along in order for them to realise the benefits which can be reaped by well implemented, business-led technology solutions.'
- James Alderson, account director, Waterstons
'Cost-cutting will always be a factor, particularly in the public sector, but we are also seeing outsourcing adopted as a strategy to achieve multiple business objectives, including growth. In research we commissioned with 100 senior BPO buyers in 2012, two-thirds said they had outsourced to support some form of expansion. When we revisited the same group last year, 67% had successfully increased their profits and 53% had seen sustainable revenues grow through outsourcing.'
- Debra Maxwell, managing director, arvato UK
'The approach to outsourcing has matured as a result of numerous horror stories. There are countless projects that have failed to meet the business objectives, and therefore millions of pounds and dollars have been lost. Governance is improving; however, the majority of organisations have yet to approach outsourcing in a way that assures the quality of service. Despite this maturity, businesses still have a long way to go.'
- Ben Fry, manager for banking, financial services and insurance, SQS
"As more technology gets delivered on cloud based systems, there is an important role for suppliers to help IT teams orchestrate and govern the multiple suppliers of cloud based solutions. Helping them with security and interoperability issues will be important to ensure that the benefits of cloud technologies are not offset by systems that can’t speak to each other and lack of governance of an organisations technology estate."
- Rajesh K. Murthy, head of Infosys in Europe