Slicing and dicing outsourcing for added business value.

In more than seven years running the InTEP program I have never encountered an organisation that believes outsourcing saved it money. That is not to say I don't encounter strong supporters of outsourcing. When I do, they talk about bringing a commercial focus to the delivery of IT service and freeing IT staff from non-value add operational activities.

Outsourcing as a strategy has definitely increased in the last six years, especially in the large business sector. Local research from IDC shows that between 1996 and 2001 there has been a significant increase in the propensity of these CIOs to outsource many of the services provided by the IT department. The research of my IDC colleague, Kathy Benson, predicts a steady annual growth in the value of the Australian outsourcing market over the next five years.

Gartner see that future growth in outsourcing will arise from a more mature strategy of its use. To date, the objective of most outsourcing initiatives has largely been cost containment and cost reduction. Now organisations are looking at outsourcing as a way to provide business value by adding skill sets not available in-house or by freeing up IS resources to concentrate on more strategic activity. Gartner sees a growing trend to outsource for speed and scale to help the business respond to new business opportunities. The use of external Web developers would be an example of such an outsourcing approach.

With an increasing focus on generating business value, Gartner identifies four strategies by which organisations could engage external sourcing and suggests potential pricing options for each. The first of these might be a strategy to better manage IT resources. This approach would pass day-to-day control to the outsourcing vendor who would probably seek to recoup costs against the resources utilised. For example the supplier might charge business units on a per seat basis or a MIPS or DASD usage. An alternative approach might be an access or rental strategy such as that deployed by an ASP model. Here the users pay as and when they need to consume IS resources.

The other two strategies are more innovative. The first of these is defined as optimisation and entails a combination of an internal IT department and external resources. The aim is to complement the internal IT department with specialised skill sets. Often this could be project based with payment determined by deliverables or milestones met. The final sourcing strategy involves a joint venture arrangement where costs are recovered on a per transaction basis. The most recent local example of this was the cooperation between companies to establish joint marketplaces for e-procurement.

Gartner believes these creative outsourcing partnerships will become more familiar in the years ahead as businesses seek to establish competitive advantage through highly innovative alliances. Any risks will be minimised by amortising the costs across the various partners. Gartner does not see any one style of outsourcing predominating. Instead it sees smart organisations choosing different sourcing options based on what serves the business best in the years ahead. In the end Gartner advises the choice will depend primarily on the desired business outcome sought.