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Love 'Em or Hate 'Em, USE 'Em STRATEGICALLY

Love 'Em or Hate 'Em, USE 'Em STRATEGICALLY

Executives who early turned to outsourcing often based decisions on emotion as much as reason, without first understanding internal costs, the vendor's capabilities or the importance of managing the relationship.

Dealing with outsourcers is all about relationships: it's knowing when to give or takeC&W Optus signed a contract for development services with IBM GSA in March 1999, building on the success of the mixed facilities management/ outsourcing arrangement it had forged with Compaq in July 1998.

To the mind of Julia Bowen, C&W Optus director of programs, that most organisations have a love-hate relationship with their out-source suppliers is the most natural thing in the world. After all, she points out, in 99 per cent of cases the out-sourcer supplier probably endures the same love-hate relationship with the organisations.

Managing to have a relationship at all levels at which you engage an out-sourcer is vital, Bowen says. What drives the success of the IBM GSA relationship in particular is the good engagement that happens at the indi-vidual project level, at the architecture level, at the management level and at the executive level. Nevertheless, there are many forces at play continually threatening to undermine the deal. Not the least is the absolute imperative - easy to demand, extremely difficult to deliver - for IBM GSA to align closely with what C&W Optus as a business needs to do.

"That's a real challenge for someone like IBM, I've got to tell you, because we change every six weeks," Bowen says.

Yet, love 'em or hate 'em, C&W Optus is dependent for its survival on IBM and a range of other outsourcing suppliers. The organisation is simply too young, and stuck in far too dynamic an industry, to be able to deliver its IS needs internally. So it uses strategic sourcing as one of its most powerful management tools.

The practice of using outsourcing as a management tool in Australia is barely six years old, with many of the early deals proving less than satisfactory. Executives who early turned to out-sourcing often based decisions on emotion as much as reason, without first understanding internal costs, the vendor's capabilities or the importance of managing the relationship. Down-sizing was frequently a hidden goal. As a result, some of these deals failed to meet the original goals and objectives.

More organisations are therefore turning to more strategic and highly selective outsourcing deals. These embrace equity investments, joint ventures and flexible partnerships as suppliers and clients work towards new outsourcing models. Such deals often pose as much risk to the supplier as the client.

With a significant number of out-sourcing contracts due to expire over the next three years, some may even decide to bring some functions back in-house. These deals include those into which AMP, Energy Australia, Customs Depart-ment, Integral Energy, Mercantile Mutual (now ING), Prudential, VIC Roads and Queensland Tafe entered.

Indeed, according to Whitehorse Strategic Group, which monitors the IT industry for the State of Victoria and Federal Department of Communications, Information Technology and the Arts (DOCITA), there has been a definite decline in employment in the systems integration and outsourcing sectors over the last six to 12 months. Whitehorse managing director Ian Dennis says the company's latest six-monthly survey of 350 Australian IT companies reveals some interesting trend lines starting to develop in systems integration (SI) and outsourcing employment.

"The general trend towards reduced employment in some sectors, predominantly telecommunications and the SI outsourcing market, is quite distinct," he says, and it's not a sectoral relocation. "Our presumption is that what is tending to happen is that a number of the older-style outsourcing projects, where there were commitments made in relation to staffing, are moving through into their second phases and that cost equations are being applied to those particular processes."

However, according to Dr Wissam Raffoul, senior program director at Meta Group, the change does not suggest enthusiasm for outsourcing in the private sector has diminished. "What's happening in the private sector for the time being is a lot of assessment as to whether outsourcing is cost-effective or not," he says. "We see the many organisations going through that phase doing a lot of assessing in a cautious manner because they haven't heard a lot of success stories around."

Raffoul says many organisations are using consultants to help them achieve a better understanding of their internal costs and the ways the outsourcing vendor can improve the quality and responsiveness of service and achieve cost savings. He also says the private sector is focused on finding ways to reduce the effort of tendering and vendor selection.

He agrees selective outsourcing will be the way of the future, in keeping with a worldwide trend. Most likely to be kept in-house are functions in which the organisation is efficient, these often including the desktop, desktop services, Unix support services and NT support services. On the other hand, mainframe services are increasingly being out-sourced as vendors become better at offering economies of scale.

Despite the debate and controversy, outsourcing remains one of the most powerful management tools available in a world where business pushes technology to respond with increasing speed and flexibility, technology becomes increasingly complex at a faster pace of change, and IT expenditures continue to grow.

In such an environment, GartnerGroup analyst Richard Matlus says, the drivers are increasingly strong for the development of strategic sourcing as a management discipline in the IS organisation. Strategic sourcing approaches sourcing needs from an integrated perspective. It implies a holistic view, both about the needs and the various internal and external sources that will be combined to fulfil those needs, Matlus says.

"Strategic sourcing is a broad approach that covers all IT-related needs and their consequences," he says. "It will deal both with the IT skills necessary to develop an accounting application and with the skills necessary to completely outsource it as a business process. This with the IT skills necessary to develop a data-mining application and with the skills necessary to design an e-business strategy using that data."

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