Executives are thinking about which portions of their function within the IT should get outsourced and which part to be kept in-house. They are usually in a dilemma, does the given IT operation give a strategic advantage or is it a sort of commodity that would not differentiate us from all our competitors? In case the operation remains to be one core strategic service, they would keep it in-house. In case it is a commodity, mainly one that your supplier claims that he would be able to provide for your business at a lesser cost than Company’s IT department could – they would outsource the same.
If only this kind of decision was that easy and simple. Between the years 1991 and 1993, we have studied the 40 United States and European companies that are struggling with this issue of IT outsourcing services. The conclusion is, in the majority of the situations, the strategic-versus-commodity approach has brought up problems along with disappointments.
To understand why this approach failed, you need to consider the underlying assumption in it – managers can place huge bets regarding their markets, supplier capabilities, motives, and future technologies with a huge deal of certainty. They don’t have the option as the world is highly turbulent, complex, and unpredictable. Even so, there are many managers that sign five- to ten- years of a contract without even considering that most of the time cannot predict how the conditions at business would change in even another couple of years – forget about the technologies that are available. They mostly turn to the outside providers so that they could gain access to all the best talent and technology at a marginal price not taking into account how the needs of a provider to increase its profits would influence the outcome.
Most of the Managers feel they are incapable of Understanding – let alone that of managing IT
For all those reasons, the issue regarding if an IT operation is highly strategic or a certain commodity is secondary is a prime concern. Any company’s highly prioritized objective has to be maximizing control and flexibility to maximize competition. To this, managers cannot afford to make a one-time decision whether they should outsource or leave it with the in-house faculty. Instead, they would need to create an environment where potential suppliers and outside companies with internal IT departments are battling non-stop towards providing the best IT services.
The huge growth of the IT industry has given companies a competitive environment. Since there are many expert players like EDS, IBM, Andersen, etc. that offer specialized services like the mainframe maintenance of computer, implementation with application development of newer technologies along with network management. Hence, organizations have the option that they can divide their It requirements into small fragments and give them to multiple providers. This approach renders much less cost so that they could switch suppliers or so that they could bring a service to their in-house in case a supplier would prove to be disappointing.
The managers from many companies have accepted this kind of selective thought towards outsourcing. Even they still feel their way ahead. They realize that the usual traditional commodity versus strategic approach isn’t working, however, because of the lack of framework, they can’t replace it.
In order to create such kind of a framework, some organizations studied the decisions on sourcing in some of the leading organizations. Most of them were large corporations, but some were public sector undertakings as well. The study conducted purposely chose those companies that compete in a huge variety of industries including, utilities, retailing, petroleum, food manufacturing, electronics, chemicals, banking, and airlines. We sought out both cases of failures and successes so that we could identify those practices that differentiated the former from the latter. About a third of the company had signed five-to-ten-year multimillion-dollar contracts providing for the delivery and management of all the IT services, and around one-quarter would continue to possess in-house units to give them those services. Almost half of the companies under the survey have taken a selective approach, where they outsource such services as data-center operations, application support, application development, telecommunications. Some of the US-based enterprises have conducted almost 150 interviews with the business executives, those who had brought in evaluations to outsourcing (usually chief executive officers, controllers, or chief financial officers), chief information officers, IT members that are used in evaluating bids and towards negotiating contracts, in outsourcing consultants, and account managers of suppliers.
Within the course of this research, the surveys looked out for some individual practices to outsource IT. Not one single company, however, worked towards combining all of these into a single blueprint that others could bring to use. Rather important if not highly significant, none of the surveyors had constructed one analytical framework explaining why these practices would work. What would be a look of such a blueprint with such kind of framework? The answer is rather simple – to show how any company’s conventional approach to the one advocated in the survey, certain instances show there exist various limitations of the approach of strategic-versus- the commodity, came to observe that through maximizing control and flexibility should be able to drive their decisions to source, and after pursuing a course that they were in a condition to change in the way ahead.
The dilemma – if one should outsource or not
In the early 1990s, most of the big global brands were beginning to question the huge investment of the companies in their investment systems. As a part of the major uphaul at restructuring efforts, some of the major brands had reduced almost by 10 percent to almost the divisions. The only glaring exception came from the IT department, where costs had gone up by 20 percent.
There have been several instances of IT outsourcing services related dilemmas. However, the resolution was simple. Businesses felt they needed to create high-end-product or service provisions, focussing on core functionalities, hence, was rather necessary. This called in for high-end IT outsourcing to select centers that came equipped with the knowledge to handle the function in a cost-effective manner.
Critical Question – What to Outsource
Adopting the approach of outsourcing would ensure that the company would tap a particular strength of the supplier that would prevent any single business supplier from having too much power. Some of the organizations experienced huge difficulties owing to the fact they were big and had to manage with one or two outsourcing partners. In a certain instance, a supplier ended up charging extra dozens of the services that the service receiver had assumed were covered in the base cost and had dragged itself into introducing new technology.
The members had also agreed that they couldn’t automatically assume that the supplier would be performing their IT department function way better and decided that the company would be given to competing in an event such doubts came up. Some of the organizations felt that data centers were an instance in point. These centers had been forced to satisfy the particular needs of the individual customers, which results in inefficient practices. If a certain unit or department had the authority of providing best practices, it may be in a condition to operate the centers more efficiently than a supplier, where a supplier had to earn profit. Furthermore, unless the department found out how efficiently without many expenses the centers could be run, it is not possible to negotiate a really good contract through an outside provider.
Once the task force agreed to the basic approach to outsourcing, teams comprising of IT managers were created to request proposals towards bids for each of the contracts. With the deep technical knowledge, the managers came with the clearest understanding of the IT needs of the company.
Based on the bids by the IT department for the data centers for a plan towards consolidating some of the larger business units into one, businesses were able to cut down their costs rather significantly.
The entire process of outsourcing the personal computers while consolidating the data centers can be a seamless task. However, some of the other business function outsourcing could be tough. Even though IT outsourcing services have come of much help, some of the critical functions like maximizing its functionality plus taking full control required help from the in-house team, as ultimate management must be from in-house.
Hence, the case of selective outsourcing is required. It helps in the ideal maneuverability of the essential functions and leaves the non-essential elements with the in-house teams. This way, businesses can understand which functions are better off in the hands of an IT outsourcing company and which functions could be taken care of in-house.