Outsourcing: What CIOs Need to Know

By Baselinemag  |  Posted 2006-08-02

Several consulting and information-technology management firms have recently come out with studies claiming that outsourcing is on the decline. According to a July survey by Diamond Management & Technology Consultants, for instance, 9% of respondents employing onshore services and 8% using offshore services said they planned to cut levels of outsourcing this year—whereas none of the respondents on the firm's survey last year said they would decrease their outsourcing spending.

The Hackett Group, an Atlanta-based research, benchmarking and business transformation services firm, is more bullish, predicting that I.T. outsourcing is thriving and will continue to do so for the foreseeable future. Baseline contributing editor Laton McCartney recently interviewed Scott Holland, the company's senior business adviser.

Q: According to your research, the typical company dedicates just over 9% of its I.T. spending to outsourcing while companies with "world-class" I.T. organizations [companies that achieve top quartile performance across a range of efficiency and effectiveness metrics in Hackett's I.T. benchmark] spend more than 14% of their I.T. budgets on outsourcing. You also say outsourcing is growing, especially among world-class corporations. How specifically is that money being spent?

A: On technology infrastructure. World-class companies today outsource about 50% of their technology infrastructure. The other area is application management. A little more than 20% of world-class companies outsource apps management.

Q: Where is the growth in outsourcing coming from?

A: The key here is that people are taking the commodity-based services and really looking to drive costs out, either through an onshore outsource relationship or through offshore, low-cost labor. The world-class companies in particular are driving that low-cost labor model.

Q: Has there been a shift in terms of where outsourcing is going offshore?

A: Some of the large companies have footprints that already exist in certain countries. Brazil is one that's coming up a fair amount, as is Hungary and Latin America, so we are seeing discussions outside the pure Indian model.

Q: It's no secret that a lot of companies haven't realized the benefits and savings they'd hoped for with outsourcing. Can you point to any particular reason for this?

A: What we find is that organizations that really spend a fair amount of time implementing best practices, really reducing complexity, and streamlining and standardizing their operations beforehand see higher degrees of success when they go to the outsourcing scenario. As an example, we worked with a particular company over the last four years that benchmarked and got an established baseline of where they were. Our benchmark is based on best practices. They then understood where the best opportunities were for them and spent the next couple of years implementing best practices. Lo and behold, when they finally sat down to do contract negotiations with their outsourcer—I sat in on some of those conversations—it was a very, very constructive and pleasant relationship.

Next Page: Where Companies Go Wrong

Where Companies Go Wrong

Q: Conversely, where do companies typically go wrong?

A: Usually by what we call "outsourcing the mess." We've seen organizations that use this philosophy end up spending as much as three times more than they'd anticipated. They also sometimes find themselves with even a bigger mess when they outsource without implementing best practice or streamlining first. Outsourcing really exposes bad or weak processes.

Q: How prevalent is business processing outsourcing [BPO]? Is it increasing?

A: Oh, yes.

Q: Who is driving that within the organization?

A: A combination of I.T. and the business units. It's probably being initiated more times, though, from the business side.

Q: How does it impact me, the CIO, if a company's business units are outsourcing business processes?

A: It depends on what's being outsourced. If a business unit is outsourcing something that's unique to that unit, you don't need to worry about it. But if there are feeders and interfaces to other processes or components of workflow involved, then the CIO absolutely needs to know and ensure that those interfaces stay intact.

Q: So if it's anything that impacts anything else in the company, the CIO needs to be involved?

A: Absolutely, if the process being outsourced has enterprise ties.

Q: Are the business units going through the CIO or just going ahead and doing it on their own?

A: No, there's a team that typically is assembled for BPO with representation from I.T. I don't see anyone going out today in isolation.

Q: I assume that, ideally, if your existing outsourcer has BPO capabilities it's preferable to stay with that outsourcer.

A: One of my clients is not only looking at outsourcing I.T., but HR, finance, procurement, the whole nine yards with the idea of going to one provider.

Q: Does the CIO need to worry about Sarbanes-Oxley controls in making outsourcing decisions?

A: Sure, you're still ultimately responsible for the systems or the data regardless of where it sits. SOX is definitely something you have to think about.

Q: Any last words of advice?

A: I think there's still too much focus on cost reduction. People sometimes don't take into account the impact on service or quality when outsourcing. If you're sourcing something that's a commodity, that's not a concern. But when you start looking at "high-touch" models such as customer service, you need to ask: Am I going to impact my quality of service or my customer intimacy as the result of outsourcing? You can't look at outsourcing as a pure cost play. Outsourcing should be viewed, yes, from a cost point of view, but also from a scalability point of view. You've got to look at this as something other than finding the cheapest provider.