Everything must go? – Strategies for successful IT rightsourcing
"One typical stumbling block is that the company doesn't know its internal IT cost structures well enough."
Outsourcing projects are usually accompanied by high expectations. The idea, of course, is that the outsourced service should be cheaper, better quality and more flexible in terms of resources and costs – all at the same time. What people often overlook, however, is that thorough preparation is needed before outsourcing parts of IT, or even deciding on which parts of it are suitable for outsourcing.
One typical stumbling block is that the company doesn't know its internal IT cost structures well enough. In such a case, outsourcing may not pay off at all because of the additional work needed for internally managing the interfaces. Companies sometimes also underestimate how much know-how that is vital to their business is lost when entire functions are outsourced. The worst thing IT departments can do is to try to revamp their "problem children" by outsourcing them. Usually, this only makes the situation worse, because the company will then have even less control over a function that is already performing poorly.
Many major, prominent outsourcing deals have fallen through in recent years, making customers more cautious. They are now paying more attention to preparing outsourcing deals, to dividing deals up into smaller, more manageable projects and spreading the risk over several providers. Outsourcing providers are also rethinking their strategy, no longer concentrating exclusively on large deals, but more and more on projects involving less risk. Smaller, clearly defined outsourcing packages are easier to plan, simplifying the relationship with the client.
One typical stumbling block is that the company doesn't know its internal IT cost structures well enough. In such a case, outsourcing may not pay off at all because of the additional work needed for internally managing the interfaces. Companies sometimes also underestimate how much know-how that is vital to their business is lost when entire functions are outsourced. The worst thing IT departments can do is to try to revamp their "problem children" by outsourcing them. Usually, this only makes the situation worse, because the company will then have even less control over a function that is already performing poorly.
Many major, prominent outsourcing deals have fallen through in recent years, making customers more cautious. They are now paying more attention to preparing outsourcing deals, to dividing deals up into smaller, more manageable projects and spreading the risk over several providers. Outsourcing providers are also rethinking their strategy, no longer concentrating exclusively on large deals, but more and more on projects involving less risk. Smaller, clearly defined outsourcing packages are easier to plan, simplifying the relationship with the client.
"Three-quarters of the savings were attributable to the insourcing ... ."
Key factors for successful outsourcing include making sure internal IT costs are fully transparent before the outsourcing begins, and clearly defining the core competencies that must definitely remain within the company. Roland Berger Strategy Consultants' IT rightsourcing approach is based on these success factors. In the first project phase, the initial aim is to achieve complete cost transparency. Every IT service is scrutinized to determine which costs are caused internally or externally, what resources it needs and where the service is provided geographically.
The second project phase checks to see whether the IT sourcing portfolio matches the sourcing strategy. The novelty of this approach is that the IT services are analyzed in greater detail and from the market's perspective. They are first broken down into all the process steps of providing the service ("plan-build-run" and further subdivisions). The sourcing requirements vary considerably from one stage to another. Subsequently, the sourcing portfolio produces bundled units that reflect various market aspects, which, if advantageous, can also be purchased on the free outsourcing market. Examples of such bundles include the operation of workstations (IMAC/D services), test factories or application management for individual application classes.
During the next stage, companies and service providers make the ideal sourcing decision for each bundle using decision trees: internal or external sourcing, core or non-core competence, centralized or decentralized service delivery using an onshore, nearshore or offshore location (Figure 1 shows typical examples of criteria that influence the sourcing decision). The criteria must allow a comprehensive assessment – based on business, financial, regional and risk factors.
The second project phase checks to see whether the IT sourcing portfolio matches the sourcing strategy. The novelty of this approach is that the IT services are analyzed in greater detail and from the market's perspective. They are first broken down into all the process steps of providing the service ("plan-build-run" and further subdivisions). The sourcing requirements vary considerably from one stage to another. Subsequently, the sourcing portfolio produces bundled units that reflect various market aspects, which, if advantageous, can also be purchased on the free outsourcing market. Examples of such bundles include the operation of workstations (IMAC/D services), test factories or application management for individual application classes.
During the next stage, companies and service providers make the ideal sourcing decision for each bundle using decision trees: internal or external sourcing, core or non-core competence, centralized or decentralized service delivery using an onshore, nearshore or offshore location (Figure 1 shows typical examples of criteria that influence the sourcing decision). The criteria must allow a comprehensive assessment – based on business, financial, regional and risk factors.
Example criteria for a sourcing decision
The IT experts assess each individual bundle of services together with the customer and decide on a common goal, which is then compared with the initial situation. In the final project phase, actions for restructuring the sourcing portfolio can be deduced from this. In addition to outsourcing, the actions can also include the in-sourcing of services or the relocation of service provision. The costs of any implementation are also estimated. In this way companies can prevent outsourcing costs from eating up the economies made.
A brief practical example might illustrate the advantages of the IT rightsourcing strategy. An international corporation with IT delivery locations on three continents commissioned independent experts to independently review the current vertical integration of all the IT services in its IT sourcing portfolio and the location mix of service provision. The experts found that more than half of all IT services were externally purchased. This also led to quality problems in service delivery. One of the reasons for the high outsourcing rate was that, up to then, the client had not clearly defined its core competencies. This definition was the central theme of the joint project and was later systematically applied to the sourcing portfolio. As a result, the company was able to cut its IT costs by about ten percent by optimizing its sourcing. Service quality is likely to improve further in the future. Moreover, the company kept important know-how in-house. Three-quarters of the savings were attributable to the insourcing of services that had previously been purchased externally at greater cost. Further savings were made possible by moving the provision of individual IT services to cheaper locations. This systematic way of working enabled the company to immediately begin implementing the results of the analysis phase. The customer has taken the IT rightsourcing method on board and will now make sure that all future sourcing decisions are in line with this overall strategy.
The article was written by Curt Cramer and Konstantin Maschke, both consultants for the InfoCom Competence Center. It was published in the CIO magazine.
A brief practical example might illustrate the advantages of the IT rightsourcing strategy. An international corporation with IT delivery locations on three continents commissioned independent experts to independently review the current vertical integration of all the IT services in its IT sourcing portfolio and the location mix of service provision. The experts found that more than half of all IT services were externally purchased. This also led to quality problems in service delivery. One of the reasons for the high outsourcing rate was that, up to then, the client had not clearly defined its core competencies. This definition was the central theme of the joint project and was later systematically applied to the sourcing portfolio. As a result, the company was able to cut its IT costs by about ten percent by optimizing its sourcing. Service quality is likely to improve further in the future. Moreover, the company kept important know-how in-house. Three-quarters of the savings were attributable to the insourcing of services that had previously been purchased externally at greater cost. Further savings were made possible by moving the provision of individual IT services to cheaper locations. This systematic way of working enabled the company to immediately begin implementing the results of the analysis phase. The customer has taken the IT rightsourcing method on board and will now make sure that all future sourcing decisions are in line with this overall strategy.
The article was written by Curt Cramer and Konstantin Maschke, both consultants for the InfoCom Competence Center. It was published in the CIO magazine.
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