There's no 'one size fits all' approach for outsourcing
Given the recent collapse of some high-profile IT outsourcing deals, Olswang's Simon Briskman outlines the sourcing strategies available - and how to choose the right one for your business.
Some have pointed to the demise of several multi-billion-pound 'mega-outsourcing' deals recently as the death knell for large scale outsourcing.
Sainsbury's recent decision to bring its outsourced IT function back in-house, and pay its way out of a seven-year deal with Accenture, follows similar terminations by JP Morgan and Cable and Wireless. There is evidence that the average deal size for outsourcing is becoming smaller and some claim outsourcing is counter-cyclical - it becomes less popular as the stock market recovers.
Yet does all this evidence really support a trend away from outsourcing, or is there a deeper underlying change in market thinking?
In the modern economy, companies are placing higher importance on their purchasing strategies than ever before. They are seeking to obtain best value and best of breed for technology and business processes by mixing outsourcing, offshoring and shared services. ABN Amro has just spent two years planning and implementing a programme which will encompass all of these elements.
This trend in procurement strategy has been dubbed 'right-sourcing'. Right-sourcing is an evolution in strategy for companies who understand sourcing techniques as a means to an end. Saving money or increasing productivity are solutions - outsourcing is just one tool to help get there. Here's a rundown of the most common strategies used today.
Outsourcing itself has come to thrive because of the complexities of modern businesses. Often companies build their technology and business processes in a piecemeal fashion. For instance, a company may acquire network capacity from a number of telcos as it expands its business. At some stage, the company will look to reduce the number of vendors and introduce cost savings and better network management. Outsourcing may catalyse the process. A suitable outsourcer would obtain better purchasing leverage and inject expertise and new network management tools.
For discrete services, going from an unplanned, multi-vendor environment to a single outsourcing contract may have advantages. These advantages are not always so clear when multiple services are considered - say a package of IT, networks and business processes. An outsourcing of multiple services could require the outsourcer to sub-contract or to use a variety of its business units to deliver.
The large outsourcing companies are very effective at running multiple services across divisions and managing niche subcontractors. However, aggregating more and more services can obscure whether the customer is achieving value for money and sufficient competitive advantage. This is despite the fact that a well-run procurement process should reveal cost data for each service and the quality of technical solutions. Large vendors may be less able to propose niche software or services providers or innovative solutions for components of the services. Who, for example, currently offers offshoring to Vietnam or China? Ten years ago, not many of the major vendors would have been offshoring to India.
Companies such as Proctor and Gamble have chosen to work with multiple vendors to select the best suppliers in different areas. Indeed, ABN Amro's deals include contracts with Tata and Infosys, two Indian-based outsourcing providers who will provide application support and development. ABN Amro also employs IBM Global Services to cover IT infrastructure (which is often difficult to offshore) while Patni in India and Accenture have 'preferred vendor' status for application development. Multi-sourcing in this manner allows transparency and independent assessment of each component outsourced.
Multi-vendor solutions can also lower risk by ensuring the entire business is not exposed to a single contract. When monolithic outsourcings end in acrimony (such as that between Cable and Wireless and IBM, which briefly went to court in 2002), exit and re-tendering can be a very fragile process. Certainly there will be more operational resilience where more than one vendor is selected for a single service.
Detractors say multi-sourcing requires greater management resource from the customer. Instead of one relationship, a number must be managed. Governance procedures will need to capture the relationship between different suppliers and the customer. Performance monitoring will require more resource and more applications if management is to have the right information to hand. Still, analysts Gartner say multi-sourcing will remain the dominant strategy over the next few years.
A third strategy will be to bring back or retain some functions in-house either because they are core processes or because the risk and value profile from outsourcing does not meet their criteria. Often, functions retained in-house can be rationalised by moving them from small support functions duplicated in a number of divisions to a shared services basis. When there is a mix of shared services and outsourcing, even more emphasis on governance is required. The key question is how to ensure smooth-running, practical solutions are found when things go wrong or unexpected costs arise. A clear division of responsibility and a clear mechanism for managing disputes is necessary.
Multi-vendor environments together with a mix of in-house services were once simply the product of unplanned evolution in a business. In the twenty-first century, right-sourcing is a planned strategy which requires careful thought and implementation. Shared services, pro-active management of vendors and using best of breed solutions are all part of the mix.
The choice of pursuing shared services, outsourcing or multi-sourcing will be one to analyse in depth. Perhaps it is not surprising that many see right sourcing as the way forward. But remove the jargon and the message is clear: To stay competitive, companies will need to use every tool in the box to achieve effective management of their organisation.
Most organisations will need to embrace radical change if they are to become truly right-sourced. This is not just because right-sourcing requires a coherent, long-term procurement strategy but also because companies need effective ways of managing their right-sourced environment. Gartner believes only 30 per cent of companies have formal sourcing strategies and appropriate governance in place.
Companies must begin with a clear vision. The choice to keep a function in-house or outsource it must form part of a cohesive strategy. Retro-fitting governance procedures to existing supplier relationships or terminating contracts which do not fit with the strategy can be time consuming and costly. Yet, well thought-out business planning and effective sourcing can lead to optimisation of an organisation and its use of resource. That must be worth working for.
Simon Briskman is a partner in the outsourcing group at London-based law firm Olswang.