Tie Sourcing Strategy to Business Strategy

Business executives have their own motivations when it comes to outsourcing IT functions. A CEO may see it as a chance to focus internal employees on core competencies or to transfer risk to a vendor. A CFO will be scouting for an opportunity to slice 30 percent off the bottom line.

CIOs can have good reasons not to outsource a certain function at a particular point in time. The trouble is that the CIOs' first line of defence tends to be IT-centric, which sounds self-serving. As a result, says Phil Hatch, founder of sourcing consultancy Ventoro, "they're not getting enough traction [with executives] when they explain what might be dangerous about outsourcing a certain problem".

The solution is to create a sourcing strategy that's tied to the overall business strategy. Sixty-five percent of IT organizations lack a sourcing plan, says Anderson of Gartner. "And those that do have a document collecting dust. It's like the letter to shareholders in the annual report. It's not an actionable document. It doesn't tell you how these decisions will be made."

A good sourcing strategy starts with the goals of the corporation and works from that to lay out the objectives for IT. That clear connection will enable the CIO to create a decision framework to guide sourcing choices.

How Dow Does It

Dow Chemical's IT leadership hasn't been bashful about outsourcing - or about how IT sourcing decisions fit into the big picture. "At Dow, our overall vision is to be the largest, most respected chemical company in the world," says Mack Murrell, the senior director of information systems and office facilities for the $US46.3 billion chemical company. "That says a lot."

What says more are the principles the company follows to achieve that goal. "Everything in IT aligns to one or more of our four strategic themes: driving financial discipline, creating sustainability, focusing on people and investing for growth," says Murrell. Keeping those principles in mind makes sourcing decisions easier - and easier to sell to the business. Dow outsources between 60 percent and 85 percent of IT functions, depending on the workload and business cycle. (Most IT investments occur during profitable peaks in Dow's cyclical business.)

Dow IT's sourcing decisions start with an assessment of skills available internally and externally. Then IT can hand an activity to an outsourcer, augment its own staff or do a combination of the two, depending on the task's strategic importance. However, core activities such as architecture, major technology decisions, contract management, security and senior-level relationships with the business that tie into Dow's four strategic themes stay in-house.

The desire to drive financial discipline led Dow to sign a 10-year deal with Hewlett-Packard to handle its global help desk. "We don't have to spend the money to build those skills up globally," Murrell says. "[HP has] much more scale and they can worry about where the talent pools are and how to make the financials work."

At the same time, Dow has kept its mainframe operations in-house, even though that's an area a lot of companies outsource without a second thought. "We looked at it because so many people were outsourcing it," says Murrell. "But we have not been able to find a company that can approach what we spend today." Again, the theme is financial discipline. Dow's internal IT resources can do the job for about 20 percent less than the leading third-party providers and the key is that Murrell knows this, has researched this and has those numbers at his fingertips.

Dow's focus on growth led to Murrell's decision to insource the bulk of the application development work he once sent to Shanghai. The Chinese market is an important growth opportunity for Dow. Outsourcer Accenture is involved in Dow's Shanghai development shop, but the majority of employees work for Dow. "It was an opportunity to hire people, get to know China and be ready for doing more business there. Meanwhile, they are learning Dow work processes as they work on IT projects," says Murrell. "Our partnership with Accenture has been very helpful in that process, but we identified and are driving that opportunity, not the other way around."

"What Dow has done is not unique," says Jeanne Ross, principal research scientist at MIT's Centre for Information Systems Research. "But it's clearly articulated." It doesn't guarantee success, of course. In 2004, Dow ended a seven-year networking deal with EDS three years early (Dow transferred that work to IBM because it thought IBM "could provide more long-term value").

Problems may occur in the course of any outsourcing relationship but a sourcing strategy ensures that initial decisions are made in the context of where the business is headed. "It provides a common language that's understood across the company," says Murrell. At Dow, the four driving principles are beaten like a drum from the CEO on down. But that's not true in all organizations. At those companies, the CIO must engage the business in conversations about the company's core mission and how IT can best help achieve it. "If you don't, you're at huge risk and so is the IT group," says Koulopoulos of Perot Systems. "Someone will come around and say: 'Why don't we outsource everything in IT?'"