Friday, August 20, 2004

Outsourcing: Gaining the competitive edge

In today's rapidly changing, highly competitive market, organizations are seeking new ways to cut costs, maximize use of resources and focus their energy on overall improvement. One way that many organizations have found to help achieve this is to take advantage of the wide variety of services available, by outsourcing many of the traditional internal service departments. This article takes a close look at the issues of outsourcing IT services, with a particular emphasis on the implications of using an external supplier for technical software development.

Why outsource at all?
In many large organizations IT is run as an operations utility several hundred IT staff. Their role is to run data centres, supply managers and scientists with the processing power required, develop bespoke applications, recommend and install "off the shelf" systems and provide help desk support. Outsourcing routine tasks to a partner allows staff to become involved in activities that create real value for the organization. The advantages in budgetary terms are the ability to turn "fixed" costs into variable costs, since staff are only on site when their services are required, combined with the ability to plan budgets more effectively as rates are fixed.

By negotiating a framework agreement with a supplier which defines the main issues of importance to the organization (e.g. performance issues, quality etc.) it is simply necessary to negotiate the scope and targets for each individual contract. The need to issue an invitation to tender for each project is removed. Thus, the need to spend time seeking suppliers with relevant skills, reading numerous proposals, meeting countless suppliers and evaluating benefits for each contract is removed.

In an ideal partnership both parties benefit from a well negotiated outsourcing arrangement. The purchaser receives a faster response to requests for support and gains access to new ideas, methods and technologies enabling the provision of an improved service to internal customers. The partnership promotes an understanding of company style and culture which means that the supplier is easier to manage than a group of ad hoc contractors. Long term, the supplier's recruitment policy can reflect the needs of the purchaser.

Why separate software development?
One of the main concerns expressed at organizations which have taken the step to outsource is that they will not be dealing with suppliers who fully understand their requirements. This is particularly true for technical software development. To ensure that the diverse projects run by scientists and engineers are carried out using the most appropriate technology and by people who can understand and work closely with technical staff it is imperative to keep this area of outsourcing separate from the provision of general IT services. No one supplier can possibly excel in all IT areas. Finding specialist companies for each business sector allows you to take advantage of their innovative approach and experience. The multi-supplier approach also ensures that you are not limited by the quality of a single supplier's skills and technologies. Scientists and engineers requiring software have more confidence in suppliers who can demonstrate a real understanding of their needs, and with a track record of similar projects.

Possible pitfalls
Signing long term contracts or tying in to one supplier can make an organization vulnerable to escalating fees, inflexible services and inappropriate skills. Alternatively, if outsourcing is carried out in an ad hoc fashion then the project managers simply move from doing the work to managing a group of uncoordinated suppliers. Any solution should ensure that suppliers have the incentive to work together to provide a seamless service, resolving inter-contract problems themselves.

If outsourcing is carried out in a rational way, using suppliers specializing in each of the services to be outsourced, if these selected suppliers provide a seamless service to the organization and if the organization reviews its needs on a regular basis, then you have a recipe for a partnership that will give you greater job satisfaction and help increase efficiency.