CIOs who outsource discrete processes that have well-defined business rules are almost always happy with the outcome.
- Why transactional relationships are the most successful type of outsourcing
- How to determine which processes can be outsourced
- What to watch out for in outsourcing relationships
You've heard the tales of outsourcing gloom and doom and read about the staggering percentages of outsourcing failure. Now consider these three CIOs' experiences:
• FIVE YEARS AGO, a business unit at US energy giant Cinergy Corporation outsourced database administration services, with no plan to extend the contract to any other part of the business. But when Cinergy centralized IT two years later, CIO Bennett Gaines called on the outsourcer to provide database administration services enterprise-wide. Since then, the outsourcer has proved instrumental in a major technology shift - from data marts to an enterprise data warehouse.
• FOUR YEARS AGO, Summit Information Systems, a software developer for credit unions, outsourced disaster recovery services for its data centre, located in central Florida. In 2004, as Florida faced the worst hurricane season in its history, "[the outsourcing vendor] was willing to do whatever it took to keep our systems up and running", says Steve Steinbach, Summit's vice president of data centre operations.
• THREE YEARS AGO, JM Family Enterprises outsourced all mainframe hardware, software and operations because mainframe usage at the $US8.2 billion automotive holding company had levelled off. The outsourcing vendor immediately optimized operations so that critical month-end financial reports landed on the desks of JM Family executives first thing in the morning rather than late in the afternoon, as was the norm. "It was the same hardware. The same data. But they were able to gain efficiencies because they knew how to run a mainframe better than we were ever able to," says Senior VP and CIO Ken Yerves.
What's this? IT executives who are satisfied with their outsourcing arrangements - even praising their vendors? This might seem strange, as mass indictments of outsourcing have led to misperceptions. In fact, some slices of outsourcing are almost always successful.
Cinergy, Summit and JM Family achieved success by outsourcing well-defined processes that had clear business rules. Jeanne Ross, principal research scientist at MIT's Centre for Information Systems Research (CISR), calls such outsourcing arrangements "transaction relationship". These are the most straightforward of outsourcing deals. The work is relatively easily defined, and the CIO wants to farm it out for clear reasons: to gain access to specific technology expertise, to deal with variable demand for certain IT services, or to free up internal staff for higher-value work. And in these relationships, vendor and customer needs are usually aligned; what the two parties want coincides more often than not.
In a recent study by CISR and CIO (US) magazine of 90 outsourcing deals at 84 companies, CIOs showed much greater satisfaction with transaction relationships than with any other type of outsourcing. (See "Sustainable Value from Outsourcing", page 49, for a summary of the research findings and the three types of outsourcing arrangements identified.) Nine out of 10 IT executives in the study reported success with their transaction outsourcing. And CIOs who develop satisfactory transaction relationships can reap more rewards than simply saving money or freeing up staff. "Companies excelling at transaction relationships achieve agility because managers focus on processes that distinguish the company, rather than the silly things they must get right but don't want to bother with," Ross says.
That's not to say all these stories have happy endings. After all, there is the 10 percent that doesn't work out. And even successful transaction relationships can create significant problems if you're not careful, such as application silos and poorly structured enterprise architectures. But CIOs who engage in well-defined and well-managed transaction relationships with outsourcers will, in all probability, gain the sustainable value they're seeking.
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