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Issue Date: November 2003 (es)

Outsourcing is a value, not a cost proposition

November 2003

The urge among corporate leaders to spend as little as possible on IT has led to outsourcing becoming a growth industry with a positively rosy outlook. But executives only in it for the money should be aware that the primary benefits of outsourcing some or all of their business areas do not necessarily have anything to do with money.

Executives are outsourcing for the control it gives them over business outcomes, not simply as a cost-cutting measure, according to results of a survey from Accenture.
The Accenture findings indicate that outsourcing, which initially gained appeal as a means of reducing costs, is being embraced for the ability it gives executives to predict business results and support strategic planning.
The survey, which entailed interviews with more than 800 health, manufacturing, retail and travel executives in the United States and Europe, found that an overwhelming majority (86%) said that outsourcing gave them more control over business results in a variety of critical areas, the most important being the ability to plan.
According to META Group, 70% of companies are currently outsourcing - with expected increases to nearly 100% by 2006 (see 'Most IT organisations will outsource by 2006' below).
And while cost-cutting is among these critical areas, the executives Accenture surveyed also reported equal levels of control in reliability, cost variability improvements, and effective implementation of ideas. More than half (55%) of respondents said that outsourcing allows their companies to implement strategies and change at a faster and more controlled rate.
"Industry leaders are beginning to view outsourcing as a prescription for change, versus an antidote to rising costs," said John Rollins, a partner in Accenture's Products operating group.
But do not count the cost advantages out, efficiencies and ROI will naturally result in cost savings and increased value on money spent. BMI-TechKnowledge (BMI-T) has announced the release of the South African IT Services Report. The report offers insight into trends affecting the spectrum of the local IT service markets from outsourcing opportunities to shifts in enterprise management.
According to Roy Blume, divisional manager IT Services at BMI-T and co-author of the report, the two most important factors that impact the IT services market are the degree of business confidence among buyers, and the degree to which vendors deploy and utilise available technology to develop compelling solutions that address buyers' needs.
"Enterprises continue to look for cost reductions and to focus on their core business through outsourcing," says Blume. "Outsourcing drivers include access to new and increasingly complex IT capacity and functionality without capital expenditure."
Cost saving and efficiencies
Choice Sourcing's Agnat Makgoale supports this view, noting: "As customers increase their dependence on technology they meet two obstacles: complexity and escalating cost. Both of these obstacles are addressed by the maturing outsourcing industry.
"Complexity is addressed through specialised outsourcing businesses that build substantial depth in their offerings, whilst costs are addressed through building significant cross customer economies of scale. We, at Choice Sourcing, refer to this as the solution to the 10% man problem. An outsourcer who employs, for example, a highly experienced Cisco engineer is able to sell a fraction of this individual's time to multiple customers.
"A customer, on the other hand, employing such an individual, needs to fill that persons time with tasks that may not necessarily utilise him at the maximum of his experience. We see customers maturing their approaches to outsourcing, by focusing on the outsourcing of non-core areas of their businesses that substantially benefit from the economies of scale provided by outsourcers. In this sense we see selective outsourcing growing strongly, while full end-to-end outsourcing is slowing."
Dimension Data's Peter Dixon agrees that outsourcing is becoming a more popular option, noting that the days of large-scale outsourcing projects are over. He says companies today are more likely to adopt a smaller best-of-breed approach from different suppliers. He, however, believes that about 50% of outsourcing deals are done with the goal of reducing costs - this in response to the cost pressure applied to IT departments over the last few years.
"They are also looking at the business value to be achieved from outsourcing, such as optimised operational activities, as well as using the savings to fund other IT initiatives."
Rob Sporen of EOH always gets nervous when a potential client says they want to outsource merely to save money.
"Outsourcing does not always result in lower costs, but does result in greater cost efficiencies," says Sporen. "Getting more value for money and taking advantage of outsourcing's economies of scale will result in reduced costs in most situations, depending on what goals the company has that its outsourcer can deliver on."
EOH divides potential outsource customers into three groups:
1. They see IT as a necessary evil. They know they have to spend money on IT but do not see the value. Outsourcing is simply a way to get rid of the IT burden for them.
2. This group is more inwardly focused. They see value in IT in terms of creating a more efficient organisation and streamlining internal processes. Outsourcing is a cost and efficiency exercise for this crowd.
3. This group is the minority and sees IT as a competitive differentiator both internally and externally. For them, outsourcing is a way to streamline the whole business and become more competitive.
The third group is the one where a well-crafted outsourcing solution can make a difference.
Peter Winn of Faritec says that in the past the reasons for outsourcing were often not clearly defined and hence the measurement of results could be difficult. Today, customers' reasoning is ROI based, focusing on the returns improved processes and the ability to effectively leverage IT investments can deliver.
He also notes that the trend today is to use three or four specialist providers to deliver outsourcing services in specific business areas. The decision of what is a core business or what is a strategic business area that can be outsourced needs to be decided upon and the method of outsourcing matched to that.
Once these decisions have been made, pay-per-use scenarios in which customers pay per transaction or processor usage (or another measurable) are becoming more popular. Users can scale their IT up and down as needed, always sure someone takes care of the applications and data and makes sure they are available when needed. The economies of scale in pay-as-you go environments benefit both the customer and outsourcing company - delivering cost advantages but also efficiencies and greater returns on IT.
Bringing global home
While servicing local organisations with outsourcing services is growing, providing an offshore location for international companies to outsource software development, call centres and/or other IT skills to is becoming a lucrative option for South African companies. There are certain problems that need to be overcome, such as bandwidth (yet again) that are hindering local entities from offering a good service to outside companies, but the overall mood seems positive that South African companies will be able to take a share of this market.
Makgoale says, "We have found that the skills pool in SA is surprisingly large. The universities, colleges and training institutes are producing quality graduates and the IT services providers are at a high level of best practice in the services space. As such I believe that there are clear opportunities to leverage our skills into high cost markets such as Europe and the United States."
One company already doing that is Computer Sciences Corporation (CSC). It has announced it has raced ahead of productivity and quality targets in operating its first offshore Business Process Outsourcing (BPO) deal in South Africa.
In April, CSC started implementing its first multimillion rand South African offshore Life and Annuity BPO assignment for an international insurance company. In three months it exceeded productivity and quality targets.
"With the quality South Africans we have employed, we will sustain these productivity levels," says Peter Drube, Cape Town-based director of BPO for CSC's operations in South Africa.
"Our processing quality has proved to be world-class, exceeding the contracted service levels. South Africa's financial services industry back-office staff are among the best in the world. Not only are our people beating the productivity norms, they are also adding value by suggesting process improvements.
In the first five months of operation, 90 jobs have been created in the offshore BPO division housed in CSC's expanding premises in Canal Walk, Cape Town. CSC expects staff levels will exceed 200 within the next 12 months.
The next step in gearing up offshore BPO facilities is the establishment of a call centre to handle American customer queries, says Drube. CSC plans to begin recruiting for the centre early next year.
Drube says that to get the new staff up to speed with work procedures, the company's human resources department has invested considerably in the development of local training material.
Staff in CSC's South African operations, along with existing CSC sites in India and other locations around the world, enables 'follow the sun' processing and business continuity support for new and existing BPO clients.
The move to BPO is becoming the world's fastest growing sector of the information technology (IT) services industry. Gartner forecasts that the global market will grow 23,1% by 2004, when it will be valued at $301 billion.
CSC's South African operations are now positioned as a key provider of offshore services to CSC clients in other geographies. That positioning along with new deals being negotiated with European and North American corporations, could create 1000 new jobs within five years for offshore BPO for global financial services companies.
Back with the Accenture report, more than 80% of the executives surveyed said they are committed to outsourcing at least one business function permanently. This trend looks set to continue, but unlike past outsourcing deals future contracts will generally concentrate on best-of-breed partnerships that deliver measurable value to local and international customers, not only in terms of costs but also ROI, efficiency and return on value of their IT investment.
Software Futures' four categories of strategic sourcing
By Ziaan Hattingh
Software Futures has developed four categories of strategic sourcing that it maintains can be applied for skills sourcing across all industries.
Firstly, there is the fully outsourced option that sees a service vendor take over all of a customer's IT infrastructure and sell the service back to them. Also in this category is what Software Futures labels out-tasking. This is where a service vendor sells an IT service to the customer.
The second category directly contrasts this and for strategic reasons, perhaps because it is a competitive advantage, a customer will perform their own software development, controlling the output and providing the resources to achieve that. The problem facing companies choosing this route is that due to generally increased market competition, they cannot afford to have software development departments that do not operate according to international best practices. Software Futures enters the strategic sourcing model in this category by consulting to customers on best practices, implementing them for the customer and providing the development tools they need to work within the framework.
The third category sees the customer in control of the output, perhaps because it is mission-critical, but it does not want to retain the resources of a software development team. In this case the company outsources the development team component to Software Futures but will control output by having its own business analyst or project leader heading that up. This can be achieved through a straightforward contract, retainer-based contractors and a third, and much newer option in the local market: call options. This sees a customer buying an option for a number of resources with the right to exercise within predefined parameters, providing them with guaranteed access to skills with payment following only if they are used.
The fourth and final category sees a customer using its own resources but having a third party control the output. Companies consider this when they have identified that software development needs to become a core competency because it is strategic to the business, but internal resources are not at the required skill level. This type of strategic sourcing contract entails a huge amount of skills transfer, where the client expects its software development team will be brought up to the level of skill of the third-party vendor's own developers. In South Africa many government departments also use this approach because although software development is not necessarily core to the business, it is a social responsibility programme that sees them investing in training their staff.
For more information contact Ziaan Hattingh, Software Futures, 011 458 6900, 082 821 6279,
Most IT organisations will outsource by 2006
According to the Outsourcing Desk Reference, a new report released by META Group, 70% of companies are currently outsourcing - with expected increases to nearly 100% by 2006. To help CIOs and their organisations through the outsourcing evaluation process, the report maps out a methodology developed by META Group called the outsourcing life cycle.
META Group's outsourcing life cycle is a tested and proven process to drive decision making, vendor selection, and ongoing relationship management. The process includes the following steps:
* Setting the right expectations throughout the organisation prior to entering any outsourcing engagement.

* Identifying the enterprise's short- and long-term business objectives and associated risks.

* Selecting outsourcing vendors that can meet the business objectives throughout the life cycle.

* Negotiating contracts with service levels that align with primary business objectives.

* Managing the outsourcing vendor relationships with a strong, dedicated team throughout the life of the contract.
"The first step should be to articulate primary business objectives before outsourcing vendors are invited for briefings. Do not make vendor selection or negotiation your first step," warns Gerrie Almon, strategic advisor, at META Group. "Most importantly, expectations need to be realistic and set ahead of time. Incorrect expectations are the primary reason why outsourcing arrangements are perceived as failures."
Outsourcing is a long-term decision that should be made very carefully. The report also outlines some of the most common misconceptions about what an outsourcing arrangement can achieve:
* IT expenses will automatically be reduced.

* Vendors use best practices.

* Offshore vendors offer huge savings.

* Vendors are simultaneously better, faster, and cheaper than internal IT.
"While such results might occur, there are no guarantees," adds Almon. "With the help of benchmarking tools, organisations need to weigh the risks associated with outsourcing against the risks of keeping the skills in-house."
"This desk reference helps senior IT leaders turn their organisations' outsourcing practices into a core competency," said John Luc Alarcon, senior vice president and director, Data Services and Published Research. "The generalisation of outsourcing, from the externalisation of commoditised IT services to more strategic initiatives, has dramatically impacted the CIO's role and the IT organisation. In addition, organisations are starting to realise that improving value from outsourcing and vendor relationship management can generate substantial business benefits."
For more information contact Eric Cowling, META Group, 011 880 5640,,

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