Outsourcing always has been a controversial topic. Does it really save money in the long run? How much can you save immediately? What areas are best to outsource? These are but a few of many questions around this topic. Our concern and key question has always been; how can it help the business perform better.
Clearly, it is a tactical device; similar in usefulness with consolidation, shared service development, reengineering, roles and responsibilities development, process change and technology enhancement.
As the chart below depicts, it is a tactic that needs to be handled well; otherwise it can generate new unwanted issues to be dealt with.
What follows is what leading business thinkers should consider first when evaluating the use of the outsourcing tactic. Use it properly, deploy it well and manage it appropriately and you can save 10-25% of the associated spend on an annual base. Rush into it; don’t consider key ramifications, don’t vet the vendors appropriately or decide not to build a Program Office to manage post deal; then continue at your own peril.
Benefits and Risks of Outsourcing
Potential Benefits of Outsourcing
- Reduce costs of current functions; minimize cost increases in future; turn a fixed cost into a more variable cost; gain some predictability of cost increases.
- Economies of scale in infrastructure
- Improved productivity of application development
- Improve effectiveness of IT support to business
- Better processes, tool, techniques
- Obtain access to resources, industry, functional and technology expertise
- Free up resources and capital to focus on other priorities
- Instill discipline in the management of IT function; instill discipline in users
- Contractually committed service levels
- Penalize the vendor for missing them
- However, there is no such thing as voluntary, no-cost overtime with an outsourcer
- Change agent
Risks in Outsourcing
- Loss of business knowledge
- Goes to the vendor or goes away
- Higher impact on application development than infrastructure
- Sometimes offset by vendor industry expertise
- Ineffective service level agreements
- Upfront investment; long term contract, expensive to get out of
- The vendor implementation team is not always as good as the sales/transition team
- There are only so many “A” team players
- Cultural differences with vendor
Critical Success Factors
- Well defined and agreed-to scope of services, performance requirements, and business objectives
- Understanding “true” current costs
- Need to measure savings opportunities
- Vendor charges for everything
- Senior management commitment
- Communications with staff
- Due diligence, due diligence, due diligence
Business Drivers in Outsourcing
- Access to industry-shaping technology thought leadership
- Access to industry-leading strategic thought
- Analysis of the Client’s technology landscape, and formulation of its strategic direction for business transformation and value-creation
- Innovative financial structuring to fund strategic investments
- Increased revenues
- Increased profits
- Improved competitive trajectory
- Enhanced customer acquisition, re-acquisition, and retention
- Partner delivery of measurable technology industry and economic development benefits to Client
IT Value Drivers in Outsourcing
- Consolidate and upgrade to standardized technologies
- Fast-track overhaul of existing Operational, Commercial and Administrative Systems
- Deployment of sufficient, suitable qualified personnel to plan, organize and control the technology transformation agenda
- Ability to plan, budget and track information technology expenditures
- Develop capital planning process
- Develop capital funding process
- Develop technology management policy
- Develop technology risk assessment process
- Improve systems to track information technology expenditure, return on investment, and return on expense
- Manage information technology procurement
- Develop information technology policy
- Timely Procurement
- Effective processes
We have collected a list of Do’s and Don’ts to help with your Outsourcing objective
