New trend: Selective outsourcing

special report Outsourcing is one of those mantras that ebbs and flows like the Sydney property market. Depending on which decade you focus on, outsourcing is either in boom or bust, but never totally out of favour.
Written by Ian Yates, Contributor
special report Outsourcing is one of those mantras that ebbs and flows like the Sydney property market. Depending on which decade you focus on, outsourcing is either in boom or bust, but never totally out of favour. In the current decade, wholesale outsourcing has lost ground, partly due to the usual dangers associated with overdosing on anything.

Gone are the days of government and corporate edict that assumed anything outsourced was better than doing it yourself. But also gone, mercifully, is the not-invented-here mantra that assumed nobody could properly provide your corporate IT needs unless they were on the payroll. Now the apparently more sensible middle ground is being sought -- selective sourcing, or right sourcing.

Seemingly obvious because it's what is being done now, the process involves constant review and analysis of IT functions to see whether they are best performed in-house or sent out to the experts. Andrew Richardson, managing director of KAZ Technology Services, provides outsourced services to many enterprise customers. He has witnessed the trend towards selective sourcing, away from wholesale outsourcing.

-The outsourcing industry is maturing and going through different growth stages and the era of the throw it over the fence comprehensive outsource is on the decline," says Richardson. -In fact it's largely dead. It's much more the norm now for companies to look at a selective sourcing strategy rather than either a total in-source or total out-source strategy."

Increasingly, savvy companies are looking at an entire business process as a target for outsourcing, rather than just looking at the IT component. Since most business processes involve a significant IT component, many of the usual suspects are offering their services as selective sourcing partners. Richardson has also seen the shift towards business process outsourcing rather than pure IT outsourcing. -If you look at the shape of the market, the fastest growing outsourcing sector is business process outsourcing," he says. -That's just an indisputable fact."

The business process targets for outsourcing are many and varied, but the HR function is popular, particularly with SMEs that can't justify, or afford the kind of necessary expertise to run their own HR department. -If you're a very large organisation with the funding and need to support a sizeable internal HR community, the economy of scale and access to expertise argument is more compelling, than if you're a medium sized organisation," says Richardson. -We see HR outsourcing particularly in the middle-sized corporates down, rather than the top end of the market. But it's really very much a question of an individual company's business strategy."

A business needs to work out what's important, where they're going to get their growth, where they're going to get their efficiency improvements. What's core, what's not core. -Typically when they go through that type of analysis, they end up with some things that they just need to do at least as well as everybody else," says Richardson. -It doesn't matter if they don't do it better because it's not a key source of competitive advantage."

The types of business processes that lend themselves to custom outsourcing are often counter-intuitive. For example, in the superannuation industry and the industry funds sector, KAZ provides end-to-end client administration services for a large section of that market. -About four million Australians have their superannuation administered end-to-end by KAZ so when they ring up to talk to the fund, they're actually talking to us," says Richardson. -Outsourcing customers have matured. It's obvious in retrospect, that if you throw something big and ugly over the fence, and stand on tip toe and look over the fence, it's still big and ugly from the other side."

Page II: Wholesale outsourcing has fallen out of fashion in recent years, and organisations are now becoming smarter about how far they go outsourcing partners.

Richardson also believes customers are getting the results they expected with current outsourcing strategies, now that a degree of realism has taken hold with both supplier and provider. -Government and corporate entities, as well as the service providers, are learning," he says. -The outsourcing market is going through an evolution and the average outsourcing deal signed today is much more likely to deliver the business outcomes it was signed for, compared to the deal signed five or 10 years ago."

Those early mega-deals that saw wholesale IT outsourcing were often driven by a desire to slash costs. Selective sourcing customers still expect to save a dollar, but they also expect to get agreed levels of service and are no longer afraid to pay a fair price. -Whichever way you look at it, however customers talk, when you get down to the short list, you worry about who's going to drop their price," says Richardson.

-Customers are talking a lot more about access to skills, attainment of SLAs, the ability to respond fast to changing market needs. But cost is still -- and I think appropriately -- to a large degree, a key driver. If you make an outsourcing decision that increases your cost over an in-source alternative, you have to be very clear on the strategic rationale. In managed services deals where there's a strong element of business continuity or disaster recovery, we're seeing customers who've done their homework on the shape of their business willing to pay a premium over internal delivery costs in order to get a higher availability solution for critical systems."

Guy Holland, a director of outsourcing with Capgemini Australia, has also seen the move towards business process outsourcing, and the shift towards quality outcomes, while keeping an eye on reducing costs. -The hot topic at the moment is more around business process outsourcing and we're tending to find that organisations are now looking at the end-to-end process," he says. -More and more organisations are saying well from an outsourcing point of view, it makes more sense to bundle the applications with the business process rather than with the infrastructure. It's a more natural home and more natural bedfellow."

-The reason is that outsourcing has moved away from pure cost reduction although some cost reduction element is a given. If you can't get a rate of say 20 or 30 percent cost reduction, then it's probably not worth doing," says Holland. -But assuming you can get over that hurdle, more and more customers and clients are looking to drive transformational change. You have to win the argument from a strategic level these days rather than purely a cost reduction level. In terms of determining which bits you outsource and which bits you don't, you need to ask 'by doing this outsource, how can this organisation support our strategic three, five, 10 year agenda, and transform this company from where we are, to where we want to go?'"

Any discussion of outsourcing these days is likely to include arguments about the virtues of offshore service providers. Holland's company operates on a global level, and uses what he calls -right shore" instead of offshore, implying that like the outsourcing debate, it's now a question of choosing which components are best done locally and which can best be done elsewhere on the planet. The IT industry is still coming to grips with a process that by-and-large has already been resolved in the manufacturing industry. -Capgemini has around 100 outsourcing service centres around the globe and they have a combination of skills," says Holland. -Some are dedicated to infrastructure management. Some are dedicated to applications management. Some are combinations and some are dedicated to business process outsourcing.

-They're located in various places around the world and our approach to this is -- and it's something that we've trademarked -- something we call Rightshore. And Rightshore simply means that we'll put the front office and/or the back office of a client's support requirements wherever is most appropriate from our network around the globe. So something that is, from a business process point of view, very rules-based, information- or data-intensive, and high-volume, high-commodity type of processing, we could put anywhere in the world."

Avanade managing director Trevor Harper, also has direct experience in the offshore debate, with a joint venture in India with Accenture, primarily focused on software development. However, Avanade also has a software centre in Brisbane and sometimes the cost differential is surprising. -The overhead of managing off shore facilities and making sure that you get it right comes at some sort of premium, and it's typically somewhere between 12 and 25 percent," says Harper. -When you sit down and do the maths on what's the best way to do this, you really need to factor that in and make sure it's included in the equation."

-We are seeing people being far more selective about how they slice and dice their outsourced components out and I think the organisations that will survive in the future are the people that are going to be flexible in their approach to how they deal with that," says Harper. -I think the days of taking the whole thing and putting it out to a single vendor are pretty much fading, and it really is because the clients have [already] tried it. They've actually not enjoyed the experience as much as they probably should have, and they're now being much shrewder about how they actually do that."

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