The New Age of Outsourcing

A number of trends are changing the nature of IT and business process outsourcing, often to the mutual benefit of the buyer and the outsourcing vendor.

People meeting

However, that's not often the case. In an environment where clients want to move the procurement process along as fast as possible, some are reluctant to give bidding vendors the time to figure out individual business outcome-based pricing. And a vendor with 100 customers may not want to take the time to develop distinct outcome-based pricing for each business.

"It takes a sophisticated seller and buyer to understand the outcomes," says Trowbridge. "Both have to want to do it, and both have to want to devote the time to do it." The client needs to take the time to make sure it wants to move in this direction; the provider needs time to get the metrics and pricing right. "Sometimes the desire is there, but the metrics just aren’t available," says Trowbridge. Other times, business-outcome-based pricing doesn't make sense if, say, you're buying 100 images of server capacity.

3. Turning the RFP on Its Head

Historically, the outsourcing request-for-proposal (RFP) process was a highly prescriptive affair. Buyers would describe, in great detail, what they wanted and how they wanted it. The similarly detailed service provider responses enabled buyers to make a clear apples-to-apples comparison, based largely on cost. It was a fairly risk-averse approach, says ISG's Franz, with the solution determined from the start by the buyers—for better or for worse.

But what if it was the wrong solution? Time and again, buyers found that "they got the solution they asked for, but it may not have been right for the environment," says Franz.

That's beginning to change. While outsourcing clients are still looking to control costs, they are also interested in taking advantage of the latest and greatest technology advancements like mobility, cloud computing and big data analytics. Also, they don’t know what they don't know. Therefore, some are turning to a much less prescriptive RFP process. "Clients are looking for something, but they're not quite sure what the answer is," says Franz. "So they are better off describing their environment and the problem and asking suppliers for their solutions."

It's a welcome change for service providers. With the traditional approach, "they end up having to artificially construct a solution that's not differentiating for them and ultimately costs them and the buyer more," says Franz. "The less prescriptive approach enables them to do something in their sweet spot."

For clients, it's quicker and less costly than the customary process. They spend a week or two drafting an engagement document versus three months on an RFP. The approach also narrows the field of competing vendors significantly, says Franz.

It requires a more mature and trusting client, he says. "[Buyer and supplier] are going on a journey together versus buying a bunch of widgets." Governance, likewise, has to be taken up a notch. "It's much more evolved and really requires strong engagement on both the service provider's and the buyer's behalf," says Franz. While there are still traditional KPIs, everything from the procurement process through delivery is much more collaborative. That change requires more frequent meetings to test the solution and make changes as needed, says Franz. And the governance process must be stipulated in the contract, including who is involved, what the guiding principles are and the methods of escalation. "All of those have to be front and center," Franz says. While it's unlikely to take hold in the government sector, this less prescriptive procurement process could become the norm in industry. "There's so much new technology available," says Franz. "And clients want to adopt and adapt to that technology in their sourcing."

4. Commercialization to Fund Innovation

Cost containment is still top of mind for CIOs, so some are getting creative about how they fund their transformational work. One option is the commercialization of the outsourcing relationship. That is, they are bundling and marketing systems and processes that an IT service provider initially develops for one client. Some clients see an opportunity in selling their assets to their service provider in order to finance other projects in the near term and potentially generate a revenue stream in the long term.

A bank, for example, may outsource the development of its reconciliation system to an IT service provider. The service provider develops a system for the bank, buys the rights to the system from that customer, and then modifies or enhances the system for marketing to other companies. If those companies sign on, both the outsourcing provider and the original customer share in the profit.

This article was originally published on 12-16-2013
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