There is a method to manage deployment of internal IS and external contractorsWe face a fundamental shift in the nature of the IS skills market because two overwhelming forces are at work. User organisations' demand for IS skills continue to rise, and economies of scale increasingly favour IS skills and solution providers. Thanks to the expansion of client/server, intranets, the Internet, the millennium bug and other urgent technology challenges, technology service providers routinely outrecruit users for IS help. They pay bigger salaries and offer more varied and attractive career paths.
These powerful market forces will drive many IS organisations from their current IS service provider mentalities to predominantly service procurer mind-sets. Certainly, IS shops will continue to grow some of their own specialty IS foods to meet their companies' specific tastes and needs. However, to survive in the coming staffing market, IS organisations must adopt a methodology that not only identifies which IS resources and services should be outsourced and which kept in-house but also provides guidelines for managing a portfolio of internal IS groups and external technology service providers.
Resource portfolio management (RPM) is such a methodology. Companies that implement RPM retain a core of highly skilled IS managers who fulfil their companies' IS needs, but to lessen the need for internal IS skills, RPM favours buying over building. Thus, an important element of an IS shop's mission becomes the ability to judge and buy. IS shops must become world-class evaluators and procurers of new technologies that will deliver value to the company. At the same time, those shops must learn to abandon the internal development of non mission-critical projects because such projects absorb important financial and human resources.
What DOES RPM Cost?
Despite the irresistible forces driving users toward RPM, some CIOs vehemently resist the idea. They cite the apparently huge cost difference between internal IS employees and outside resources. But these CIOs miscalculate the cost equation. Forrester's research shows that the cost difference shrinks when the hidden costs of internal employees are properly factored into the comparison.
Even more dramatically, the difference in costs practically disappears when the expense of not having the right IS skills as you need them is factored in. It is telling that while almost half of the CIOs we interviewed admitted they were limited by the IS skills shortage, those who felt most limited relied on growing their own IS employees for 79 per cent of their needs. At the same time, those who felt least limited relied on internal employees for only 55 per cent of their needs.
Clearly, the CIO willing to procure expertise rather than develop it will not only be able to better control costs but will also operate a more flexible shop. "Internal IT Labor isn't as cheap as you think," points out the CIO of a large telecommunications company. "Our rate is $US65 per hour, including recruiting, training and hidden costs, while contractors' rates are $US76 per hour. And that doesn't include the opportunity cost of not having a body when you need it." Indeed, while many CIOs perceive the multiple of employee-to-contractor costs to be as high as 2.3, the actual multiple is closer to 1.2.
Planning for RPM
Forrester recommends a triad of categories that determine what should and should not be outsourced. To examine your company's needs this way, divide IS activities and new projects within the portfolio into three groups: critical, critical and differentiating, and neither critical nor differentiating.
Critical functions support important business processes but aren't a source of competitive differentiation. For example, an IS application, infrastructure component or project can be deemed critical if a failure would shut down a customer-serving or revenue-supporting operation, or if a failure could result in a legal or regulatory breach.
An IS function is both critical and differentiating if it is part of a current or planned-for customer experience that drives decisions to choose one company over another or if the capability would cause a company to lose competitive strength should a competitor adopt it.
Companies that move to the RPM approach will find they have created a different IS resource allocation map. They will also find that the triad of categories will make adhering to a few managerial principles easy.
Use outside suppliers for all non critical needs. IS applications and infrastructure that aren't critical to your business and don't provide competitive differentiation, such as data centre operations and WAN support, are commodities. These utility-like functions can be obtained from external providers that will provide the required service quality at the lowest cost.
Open critical - but non differentiating - IS services to competitive bid.
Decide between internal and external providers using a fair competitive bidding process. To be sure the process is equitable, establish both the real cost of providing these services in-house and the required level of service. Most companies underestimate the true costs of providing a service by failing to include all the indirect support costs and overhead. Similarly, most IS groups overestimate their business customers' service-level needs and take pride in delivering gold-level services when less is actually required.
Protect critical and differentiating services. Only the most trusted vendor partners should be allowed to supply IS services that set a company apart from its competition. Many companies will choose to deliver these services with in-house resources to minimise the risk of a competitor getting its hands on the technology. Whether an external vendor is involved or not, an RPM IS shop should maintain the design responsibility and the necessary technical know-how to run and improve the system on its own.
Take Six Giant Steps
To make an IS organisation one that supports resource portfolio management, an organisation must commit to six procedures.
1. Treat existing internal IS groups as separate organisations. Evaluate them as profit centres by requiring them to cover their costs completely by charging users for services. This is not as tall an order as it first seems. Internal IS profit centres have a cost advantage over external providers because they do not need to make an actual profit, nor do they require extensive sales and marketing organisations. Going to such a model eliminates the need for elaborate benchmarking studies. What's more, if users know that any work they ask for will ultimately result in a bill, requests with questionable value will decrease.
2. Make the contract signers live with their decisions. Employees who negotiate contracts should be responsible for managing them.
3. Consider expert help. The rise of the technology services market has created a new breed of professional services called outsourcing intermediaries.
Typically specialised practices in or spinoffs from law or consulting firms, they provide unbiased assistance and training in development, cost/benefit analysis and contract construction.
4. Define responsibilities. Before any transition begins, be crystal clear on where company responsibilities end and vendor responsibilities begin. The rules of the game must be explicitly spelled out in the contract.
5. Divide resources. No internal IS person should be left without a job because of a shift to RPM-overall demand for IS skills is too high. However, do specify in the contract which key individuals will be kept as internal employees by protecting them with a no-poach clause. Require the IS service provider to absorb the remaining staff.
6. Reassimilate the people. The key to reassimilating employees quickly into new RPM roles is an effective and informative communication plan. The top priorities of this plan-careful message development, refinement and clear delivery are similar to those used during any major IS organisation change (a merger, for example). Messages should focus on business reasons behind the decision, vendor strengths, business plans and opportunities for the unit.
Moving to a procurement-based strategy from the historic model of a provider-oriented structure will be a big step for many IS employees - some of whom won't be there when it's over. However, the transition is essential.
Companies that resist the new forces in the IS skills market will wake up one day to find their best people gone and their future resting on inflexible, tactical arrangements with external IS providers.
Bob Chatham is a senior analyst for Forrester Research in Cambridge, Massachusetts. He can be reached via e-mail at firstname.lastname@example.org
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