Despite some very negative publicity the IT outsourcing industry remains in rude health. War stories of unsuccessful, money-wasting deals abound, and yet the industry continues to grow, and was worth an estimated $450 billion in 2004.
In part, much of the fascination with outsourcing stems from its promise to drastically reduce operating costs. But as the industry has matured it is increasingly seen as a safe strategic option. This is thanks to the burgeoning sophistication of outsourcing partnerships, says Gary Heffernan, senior partner at management consultancy Accenture.
While many early outsourcing deals sank in the uncharted waters they were exploring, the industry has now accumulated sufficient knowledge to make outsourcing not only reduce operational costs but also add value to the enterprise – and even entirely change the way large corporations work.
One of the most essential components of a successful outsourcing deal is a customer with a clear objective for the process, says Heffernan.
Without a clear expression of the operational and strategic goals of such a deal, it is difficult for the outsourcer and service provider to co-operate as they should.
If pre-deal talks focus on the minutiae of service level agreements and pricing, without expressly defining the business aims of the deal, discussion of what should be a joint enterprise can descend into a competition to see who can negotiate the most favourable terms. This sets a precedent for an adversarial relationship which will linger long after those precise details have been revised and renegotiated. "In an adversarial environment, nine times out of ten the service provider will win," Heffernan says.
Often misconstrued as a "master-servant" relationship, establishing trust between customer and service provider is essential, requiring explicit understanding of how the inherent risks are shared.
Such a relationship can encourage a company to be more adventurous with what it outsources. Selectively outsourcing various functions to best-of-breed service providers, for example, will take deft management on the part of the customer, but should enable it to make sure non-competitive operations, such as pay-roll and data centres, are being handled by experts and at competitive rates.
In the last few years, many companies have even relaxed their instincts to maintain direct control of critical business functions: for example, Hutchinson 3G outsourced its Australian mobile telecommunications network in 2002 – the quality of which was regarded as a key competitive advantage – to Ericsson.
Moves such as this may be anathema to some; a radical challenge to more established schools of corporate thinking. But some business leaders envisage a future where large scale operations are handled by consortia of different companies that share operational risks but divide the work among themselves according to their relative capabilities.
This "business transformation outsourcing", which strategically redefines the company's operations, may be too much for most companies to swallow for now. However, it does, in principle, embody the co-operative ethos that is increasingly recognised as the way to make outsourcing work.