ANALYST SPEAK: Outsourcing is not just for cutting costs anymore

Outsourcing is not just for cutting costs anymore, according to the 2005 Global IT Outsourcing Study from DiamondCluster. Instead, enterprises should—and are beginning to—see it as part of an overall strategy, one that redefines successful management and requires a hands-on approach to relationships with providers to help gain maximum value for the outsourcing effort.

The strategic approach to outsourcing calls for a multifaceted view of IT management. When rationalizing outsourcing, the study found there has been a “gradual shift away from cost as the dominant driver for outsourcing decisions.” Enterprises are now redeploying resources, freeing them up for more critical and strategic purposes, rather than just reducing head counts.

The better management of fluctuating capacity needs is also factoring into outsourcing decisions. The natural ebb and flow of IT demand can strain resources. Sophisticated IT organizations recognize this and are becoming adept at structuring outsourcing provisions for “flex capacity” to meet the variable demands.

The study cites two other key components to a successful outsourcing strategy; both call for increased communication in the relationship between outsourcing buyer and provider.

  • Buyers and providers must establish win-win propositions where neither party feels like they have been taken advantage of.
  • Buyers must establish clear and meaningful metrics and measures to gauge the success of their outsourcing endeavors.

There is a need for better service level agreement management, according to the study. This year, 73 percent of buyers were administering penalties as part of their SLAs, with the other 27 percent issuing rewards. The study’s authors fear that an unbalanced emphasis on penalties may establish an adversarial relationship between outsourcing buyers and providers. As one CIO warns, “Don’t squeeze the provider too much during contract negotiations. Make sure SLAs are easy to measure and administer.”

However, measuring the success of an outsourcing relationship is difficult. Buyers still regard on-time delivery, cost effectiveness and user satisfaction as the three most important areas of measurement. The study also finds “many buyers lack the rigor, structure and discipline necessary to measure these areas in an effective manner.”

Most buyers generally report they still monitor their relationships with providers through metrics reviews, site visits and qualitative relationship evaluations. That is adequate to assess the overall health of an outsourcing relationship but fails to deal with the day-to-day issues that may arise. As a result, 56 percent of buyers are “most concerned about impacts on day-to-day operational activities, including delays in issue resolution,” according to the study.

Proactive enterprises are starting to demonstrate stricter governance over their outsourcing operation. Sixty-eight percent of buyers perform metrics reviews monthly, in some cases more frequently. In addition, 92 percent regularly visit their provider facilities, up from 75 percent in 2004. The study’s authors believe this is “extremely important for buyers, as part of a comprehensive sourcing strategy. Assessing and affirming metrics, SLAs and overall provider commitment to delivering value should be part of this due diligence process.”

About the Author

Jamison Cush is assistant editor at Application Development Trends magazine.