Look outside when it comes to the crunch

As we exit a difficult 2010 and move into 2011 the economic leader writers seem to have reached consensus on only one fact: that the forecast remains uncertain. There are certainly encouraging indications of a potential upturn, but plenty of warning signs remain that we may not be quite of the woods just yet.

Against the backdrop of an on-going global downturn, there is a noticeable trend emerging of organisational retrenchment with an associated tight focus on core competencies which, in turn, is driving another wave of outsourcing. The recent Management Consultancies Association (MCA) survey of British Bankers Association (BBA) members found that 41% had reported an increase in outsourcing levels. The usual suspects of HR, IT and Finance top the list of candidate functions and it is interesting to see that insurance and investment businesses are ahead of their colleagues in retail banking when it comes to outsourcing uptake.

Forrester Research now estimate that the global IT services and outsourcing market has an annual value of $530 billion, with continued growth predicted into the foreseeable future. It would appear that this latest generation of outsourcing initiatives has succeeded in moving on somewhat from the automatic ‘cost-cutting’ stigma previously automatically associated with the strategy. The Bankers Association survey also noted that over 90% of financial services firms had outsourced some part of their business and, most interestingly, that 58% of those surveyed felt that outsourcing has actually made their organisation more competitive.

Paradoxically, there is still no doubt that there is an art to ensuring that outsourcing does deliver on the value-add promise and does not simply default to the lowest common denominator of cost-reduction. For example, the technology function has been resolutely marching down the long and difficult path of reclassifying itself from ‘Information Technology’ to ‘Business Technology’: an entity with genuine credentials as a business accelerator rather than an (expensive) cost-centre with very little strategic input. This initiative is, in and of itself, too important to compromise whatever the short-term attraction of cost-driven pressures in an economic downturn. As the technology function evolves there has been a parallel emergence of two well established models for sourcing relationships, the Single-Vendor approach and the Multi-Vendor approach. The definition of these relationships establishes the role of the internal IT of the organisation and that of the external provider.

In the Single-Vendor scenario the customer transfers the entire management and delivery of an IT service to one external service provider. Internal IT migrates to an internal advisory role, as a subject-matter expert to the business, and the provider liaises directly with the business users. As no single vendor exists who can cover all dimensions of service delivery the prime partner will contract in further external parties whilst owning and being held accountable to the over-arching service level agreement.

By way of contrast, a Multi-Vendor Approach is the solution often selected by organisations in the Cayman and other OFC’s. This option establishes a relationship between the external provider and the internal IT department, which retains ownership for overall service management. Internal IT then manages the SLAs to cover all business requirements and contracts with service providers to deliver according to the most effective solution for each service. This works well as the customer retains the specialist knowledge of its business and the translation of requirements to IT services, which allows the business to flex, change and adopt appropriate sourcing strategies as the dynamics of the internal and external environment change.
In addition, the selective outsourcing of specific IT functional areas can represent an attractive option, particularly when it can be demonstrably proven that these initiatives extend the scope and/or reach of the existing in-house capabilities. To provide a specific illustration, multi-jurisdictional expansion is also an observable phenomenon for some companies who are head-quartered in the Cayman Islands. This trend brings with it a new challenge, the requirement to develop a world-class, genuine “follow-the-sun” operational technology support competency. When a business user in a different time zone needs help in the afternoon, they expect to receive it and to build and maintain this competency internally looks like a very expensive option indeed.

As a strategy, looking outside the organisation for help has obvious attractions, yet it is not an option without risk. The BBA survey also reveals that only 54% of respondents felt that their organisation understood how to extract good value from outsourcing. Forrester Research echoes this and highlights the top three areas that could be improved across the entire outsourcing process:
Better education of business executives and internal end users
More clearly documented internal processes
More rigorous specifications

These value-driven factors speak to a growing maturity in approach and indicate a far greater chance of success in future engagements.
Whatever practical implementation approach is adopted to deliver on the promise of outsourcing, there remains the opportunity to deliver significant competitive advantage. This is particularly the case as many organisations in the geography have yet to fully appreciate the diseconomies of scale that accrue by attempting to build a best of breed IT service delivery model entirely in-house, when very valid external options from multiple provider sources are present. Pursuing this strategy to its logical conclusion can only lead to a disproportional over-burdening of cost to the host organisation, or a compromise in service delivery standards.

Christopher Eaton MBA,
VP Sales and Marketing, MCS.
Contact [email protected] for more information