Start with 'in-house bias' before outsourcing

Start with 'in-house bias' before outsourcing

Summary: Motives behind outsourcing IT cannot be solely about cost savings, but consider business requirements and brand equity.

TOPICS: Outsourcing

Companies should begin their evaluation with an "in-house bias" toward IT tasks and then decide whether to outsource only areas they're weaker at handling.

Particularly in developed economies, companies are using automation and self-service technology for more IT management tasks done by both employees and external customers, said Roy Illsley, principal analyst at Ovum.

As automation becomes more advanced in the future, the value outsourcing holds among companies could erode over time, but it would be at least another 10 to 15 years before this trend becomes apparent, he pointed out. Also, the market for outsourcing is driven by cost, so outsourcing as a model won't disappear in the future, but just vary in the extent of use--based on how strategic a company sees IT and how much its business depends on it, for instance an e-tailer versus a beer brewer, Illsley said.

Steve Hodgkinson, IT research director for Asia-Pacific at Ovum, argued that demand for outsourcing will not cease, regardless of the availability of in-house alternatives such as automation. There are many enterprises unable to assemble and sustain a package of people, processes and technology, and hence find value in buying it as a service from a vendor, just as there are others which sufficient skills and funding and prefer to maintain in-house control over IT activities, he noted.

Non-core functions for outsourcing
Fred Ng, senior analyst at Gartner, pointed out that generally, IT functions that are non-core to an enterprise's strategic competence are the likeliest candidates for outsourcing, as compared to core functions that would be kept in-house, so management has better control over them and "run a tight ship".

Still, there is no one-size-fits-all checklist as to which IT functions are best or ill-suited to be outsourced amid rapidly changing market conditions today. Plus, it is difficult to generalize between companies, their organizational size, and how adept they are at running IT entirely on their own, said Ng.

The analysts were unanimous that regardless of whatever IT task is being outsourced, what matters is the motivation for doing so, and companies must strategically evaluate the benefits and drawbacks before making the decision. Monetary savings, they added, cannot be not the sole factor.

If companies want cheap services, they cannot "have their cake and eat it", said Illsley. He noted that most companies do realize a balance between cost and service to what is being outsourced, yet the dash to outsourcehas been made without due consideration for brand equity and the non-monetary cost they end up paying.

Pitfalls of outsourcing
Using the example of offshore call centers tending to customers, Illsley noted that there is an impact on brand value and company reputation when customer-facing activities are performed by external third parties.

Ng added that as far as it is logical and reasonable to outsource, enterprises still have to take time and effort to think strategically first, or risk "disastrous" outcomes apart from affecting corporate image.

For instance, a company which outsourced IT applications piecemeal to multiple outsourcing providers could, over a period of time, wind up with a sprawling IT infrastructure filled with incompatible applications and platforms that cannot be integrated with each other, creating disconnects in internal processes which defeats the purpose of efficiency and savings.

Start with in-house bias
Hodgkinson noted that enterprises need to always remember that delegating a service to an outsourcing vendor does not absolve its own executives of responsibility. The core management functions of strategic direction, technology and information architecture, and contract management should never be outsourced, he added.

The crux is all about properly understanding business requirements and objectives beforehand, because poor understanding leads to poor implementation, which has nothing to do with the outsourcing concept, the analyst said.

"When push comes to shove, it is vital that the enterprise deeply owns a strong grip [on three areas]: its strategic IT direction, the glue that binds its systems and information together to align to business goals, and its ability to manage any and all contracted services effectively, which includes having a plan B if things go wrong."

The Ovum analyst advised enterprises start with a "bias toward insourcing" where their existing capabilities are strong, before seeing where they are weak in, and better capabilities can be sourced from third-parties. This entails focusing on the IT activities that are managed better if it is done externally rather than in-house, and not because it is less expensive.

"At the end of the day…you get what you pay for, so the enterprise needs a solid understanding of what they're looking to buy, whether it's the least cost, or the highest value-add," he noted.

Topic: Outsourcing

Jamie Yap

About Jamie Yap

Jamie writes about technology, business and the most obvious intersection of the two that is software. Other variegated topics include--in one form or other--cloud, Web 2.0, apps, data, analytics, mobile, services, and the three Es: enterprises, executives and entrepreneurs. In a previous life, she was a writer covering a different but equally serious business called show business.

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  • I have seen enough outsourcing to know enough to never do so.

    Where I worked last, they outsourced a major web initiative to a well known firm, with an extensive history of project failure to deliver on time, within budget, and in full compliance with original specifications. These failures were huge, well publicized, and most of these results persist to this day. Nonetheless, management bought the bill of goods, and have suffered from all of these issues and more since day one. Unfortunately, the decision makers behind this nonsense are still there, and to do anything to correct this situation would require they admit they made a mistake at the outset. This will never happen, and so they will continue to accept living with substandard results as long as they work there. Some companies elsewhere experienced similar results, and despite the monetary write-offs necessary, pulled the plug before they all went down the waste main. These are companies with some intelligence, and will do well as a result. The rest of them, considering these decisions were made for totally spurious reasons, all related to cost savings, will suffer the consequences of their foolishness until liquidation time comes around. The outsourcing firm will still walk away with their profits, laughing up their sleeves, knowing full well there will always be another sucker.

    I was trying to buy some Dell servers recently and was so frustrated with the service I bought HP instead. Dell is quickly becoming the example of how not to outsource.