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Is IT outsourcing a dying concept?

Outsourcing has become a dirty word and the process it was meant to describe has evolved

According to a recent survey by outsourcing analyst firm HfS Research, 63 percent of IT leaders would like to drop the term "outsourcing" to describe the IT services provided to them by third-parties and 68 percent of IT service providers want to do away with the designation.

Some of that can be attributed to the negative connotations associated with the word "outsourcing," particularly on the heels of the recent US presidential campaign that trotted out the practice as a job-destroying boogeyman.

But it could also be that the term has outlived its effectiveness. "Like many invented terms, the process it describes has evolved considerably from what it was initially," says Cliff Justice, partner in KPMG's Shared Services and Outsourcing Advisory.

In his report earlier this year, " The Death of Outsourcing," Justice argues that as the use of third-party IT service providers has evolved from a simple "lift-and-shift" back-office cost-cutting exercise to a complex ecosystem of smaller deals, higher expectations, and more business-centric services, the way customers and providers think and talk about outsourcing must advance as well.

The low-hanging fruit has been picked. Organisations will find it difficult to rely on their low-cost, low-margin service providers to be in a position to step up with the kind of investment needed to give them additional competitive advantages.

Instead of delineating between insourcing or outsourcing or offshoring, Justice writes that IT leaders should embrace the extended global enterprise, not a specific model or set delivery structure, but rather a paradigm for delivering business services based on the concepts of end-to-end processes, internal and outsourced service providers, high value services and strong central governance."

CIO.com talked to Justice about the shift taking place in IT services, the inherent inertia on the part of both customers and providers to embrace new models, and the potential winners and losers in a world beyond outsourcing.

CIO.com: When did IT outsourcing really start to shift in terms of both structures and expectations and what have been the most significant changes?

Cliff Justice, KPMG: It really started to shift around 2006 to 2007. We are seeing a transition from outsourcing as a commodity that's very price-focused to a service that's much more value-oriented. Companies with the most mature arrangement – the ones I call Extended Global Enterprises - have shifted or are shifting to integrating the use of third-parties and managing that integration in a way that promotes their business goals. The result is more innovation, more new product ideas, and more new services.

CIO.com: Who's driving this transformation – customers or service providers?

Justice: Mainly the customers. The value that service providers can offer extends to helping a company compete more effectively in the marketplace for customers – by helping with product development or entering new markets, both of which help to drive customer growth.

CIO.com: You describe this as the "death of outsourcing." Why is outsourcing, in its present state, unsustainable?

Justice: Outsourcing became too reliant on labor arbitrage, which is a very short-sighted strategy. For example, wages in India have gone up from 10 to 14 percent yearly since 2009. Also, the offshore talent pool is smaller than it was five years ago, further limiting labor arbitrage as a strategy.

CIO.com: But isn't cost-cutting still an important factor in sourcing decisions, given continued pressure on IT to do more with less?

Justice: Cutting costs is very much a driver. However, companies are demanding more value from third-party services, such as the ability of the provider to partner and move business goals forward. That's a big change from the way it was five to ten years ago.

CIO.com: What kinds of outcomes are customers seeking from IT service providers? More importantly, are the providers capable of delivering them today?

Justice: Clients are looking for increased agility, reduced fixed costs, availability of working capital, better insights into trends they'll need to take advantage of, to name a few. Providers that are growing and excelling are aligning with their clients' industries and specialising in order to help their clients compete better. In so doing, they're becoming more valuable to their client organisation.

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More about: KPMG
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