Friday, March 24, 2006

Strategic Outsourcing: Testing the Outsourcing Waters and Staying Afloat

Before Gertrude Ederle began her historic swim off of Cape Griz-Nez, France, she underwent extensive training for endurance and technique—even though she was already an accomplished record-breaking swimmer with Olympic medals to her name. Outsourcing IT may not garner the same attention as being the first woman to swim the English Channel, but it is no less important to gather as much experience and knowledge as possible on a small scale before diving in for the big swim.

The trend toward IT outsourcing is increasing dramatically. According to a report by Foote Partners, as much as 45% of North American IT work will be outsourced by 2005. And there are good reasons behind this trend. Bruce Caldwell, principal Gartner analyst believes companies can generate 20-30% savings through outsourcing. This substantial savings potential isn't easily overlooked, yet it isn't the number one reason companies are choosing to outsource right now. In a recent survey by The Outsourcing Institute, the primary reason behind outsourcing is to improve company focus. Other motives include freeing up internal resources, accessing top-notch capabilities, and accelerating time to market. The survey also indicated that 55% of firms who outsource do so within IT—more than any other area.

As more companies begin outsourcing some or all of their IT function, it becomes difficult to ignore the competitive pressure. With competitors achieving their IT needs at 20-30% less cost, and getting ahead in the market because of increased focus within the company, those who ignore the outsourcing trend could potentially lose ground very quickly.

At the same time, outsourcing horror stories abound. According to Gartner research firm, half of the current outsourcing projects will not meet the company's expectations and will be considered failures. While the vast majority of these failures are only minor disappointments where the company decides to outsource to another vendor, certainly a few are major catastrophes. An anonymous case study in IT Metrics Strategies discusses a CIO who chose to outsource to beat competitors to market. The outsourcer had promised to meet a deadline his staff had said was impossible. When the outsourcer failed, the CIO couldn't rebuild his team fast enough to finish the job. In the end, the product never got to market at all.

So how do you secure all the benefits of this outsourcing wave without getting dragged into the undertow? The key is strategic, selective outsourcing. According to Corey Ferengul, VP of the IT research firm META Group, an increasing number of companies are choosing to outsource non-core IT tasks. Common responsibilities going to third-party providers include Web hosting, call centers, data storage, and database administration.

"There's a learning curve and a life cycle to outsourcing," said Caldwell, "and it can be expensive finding the right vendor, as well as going through the transitions of taking your operations to that vendor." Stable, yet customizable IT functions provide an excellent training ground for outsourcing. Any function with known benchmarks for performance and results, as well as available, reliable outsourcing partners is a good place to start.

Ultimately you may want to outsource your entire IT department, but first you need to get a handle on managing an outsourced process. Some companies may discover they don't need to incur the risks and organizational chaos of switching to total IT outsourcing. By nimbly carving out and outsourcing small pieces of the IT function that deliver the most cost and quality benefit, companies may find they are already receiving maximum savings at minimal risk. However, they will have done some carefully planned and executed experimentation before making that decision.

For details read here.