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

The key word is "if": There have yet to be any high-profile examples of vendors able to take these commercialized systems to market in a meaningful way, says Trestle Group's Schonenbach. "The model itself is a nice idea, but commercialization is not the core competency of either party," he says. "That's where it runs into challenges."

Customers also need to consider what the exit strategy might be if the arrangement doesn't work. "If you're not able to take it to market successfully, then what happens?" asks Schonenbach. "Do you have an agreement to bring it back in-house? What about your loss of key resources?"

But there are benefits beyond additional revenue to outsourcing customers' taking a chance on commercialization. They rid themselves of the legacy system burden, which presumably has been upgraded and is now managed by a third party. And, as other clients come on to the system, they benefit from the larger investment in system enhancements over the long haul.

"People within IT find it exciting—developing an application and selling it to the market," says Schonenbach. "The go-to-market strategy doesn't happen in your typical outsourcing arrangement." It requires customers to be much more involved and visible in the marketing and sales of the product. And the IT service provider needs the sales capabilities to succeed.

Initially, tier two providers were most likely to enter into such commercialization arrangements, but interest has been increasing among big players as well. "There needs to be an appetite to do it," Schonenbach says. "The more entrepreneurial suppliers are moving faster in this direction."

5. The Increased Significance of Service Integration

The single-sourced mega-outsourcing deal—the shifting of the majority of an organization's IT or business process work to a single provider—is dead. In recent years, the market has seen a significant move toward multisourcing, which can provide the flexibility, cost competition and access to skills that enterprises need. "If you get the right service providers with overlapping capabilities, it creates a natural tension and competition," says Lee Ayling, head of KPMG's technology sourcing practice in the U.K. If there's a service failure, the customer can take that percentage of their wallet share and give it to another provider. Service providers are getting used to that fact. "They don't have a choice," says Ayling. "If it's a global [customer], the deals are so big anyway, it’s in the service providers' best interest."

For buyers, the effective management of that multiprovider environment has become increasingly important—and increasingly complex. "If you have three providers looking after your IT, there's quite a lot that the buyer needs to do to integrate those services," Ayling says. "The more strategic parts of service integration are being brought in-house."

The goal of service integration is to manage providers in a way that accommodates business demands. Third parties—from consultants to the service providers themselves—have offered this service to clients. But, says Ayling, "historically that hasn't worked," and increasingly, organizations see the benefit in doing it themselves.

Setting up a service integration shop from scratch isn't easy. Buyers have to find the 20 or 30 professionals with the right skills and often must work in conjunction with their service providers to develop the appropriate capabilities.

6. Re-examining the Big Picture

Over the years, clients have outsourced various components of organizations to various vendors in various countries for various reasons. This silo-by-silo approach to building up a sourcing portfolio did not necessarily translate to the best delivery strategy. Today "clients want to take a look at all the different pieces," says J. Marc Mancher, the head of Deloitte Consulting's insourcing and outsourcing advisory services in the U.S. "They've got four vendors in three locations and then another five locations where they do the work themselves, and they want to figure out whether or not they put the pieces together right."

This article was originally published on 12-16-2013
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