IT outsourcing: When it's necessary and when it's not

With Britain still managing a weaker economy than its traditionally used to outsourcing has become a necessity to keep businesses afloat and to stay competitive. Often outsourcing teams or projects proves to be an effective method to get high-quality work done without the need to go through the hassle of finding permanent staff, but is outsourcing always effective? I spoke to Rick Simmonds, managing partner of Aecus, all about outsourcing; when you should and when you shouldn't, questions to ask ensure your business is right for outsourcing, and why outsourcing has become a trend in IT.

Why do you think the IT sector in particular was seen an increase in outsourcing? What is the reason for the trend, would you say it’s due to new technologies, a change in working philosophy or a combination of both?

There are a number of reasons why ITO (IT outsourcing) continues to grow, some to do with the market and some to do with technology.

The first is the market. ITO is now a mature field, with many second and third generation deals and a wide range of large, sophisticated suppliers keen to grow their businesses. This means that there is something of a ratchet effect – relatively few deals are terminated and brought back in-house, most are renewed with the incumbent or re-let to another supplier.

Although deal scopes flex, with some functions moving in or out, on the whole this means that there is a solid platform of existing deals, with new first generation deals and expanded scope on existing deals providing constant growth. The rate of renewals also indicates that most clients are at least reasonably satisfied with outsourcing as a delivery model – although some might argue that deals are renewed because clients no longer have the skills and experience internally to take work back in-house.

The second is access to skills. For example, most ITO deals have a substantial offshore component. It is hard for most client organisations to compete with specialist outsourcers in building sustainable, scaleable, high-quality offshore operations. Only the very largest organisations are likely to be able to invest enough and have the scale to offer attractive careers to IT professionals, compared to the major outsourcers. So as the amount of work delivered from offshore increases, so does outsourcing.

The third and final reason is technology and access to skills – the rate of technology change continues to increase. It is arguably easier to access new technologies like digitalisation and robotics through leveraging the investment of outsourcers. And, of course, the cloud and the trend to “as a Service” is a big driver of using outsourced resources which are delivered in a cost-effective way not available in-house.

In terms of “working philosophy”, the big change over the last 10 years is that outsourcing has become an accepted norm. It used to be a more controversial and esoteric business model, whereas now it is firmly mainstream and part of the popular lexicon.

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Empty meeting room, outsourcing

...no ones in the meeting room...I'll check the car park[/caption]

Obviously you have a great belief in outsourcing, could you run us through some of the “sticking points” or aversions businesses have toward outsourcing and explain why businesses tend to have said “sticking points”?

Actually at Aecus we’re absolutely agnostic about outsourcing! It is a commercial model for delivering results, and in some circumstances it is the right model, in some circumstances it isn’t. But to answer the question, these are some of the key concerns that businesses have.

An important consideration is the loss of control of the service. Businesses fear that if employees no longer deliver the service, they won’t be able to get what they want, when they want it. In other cases, businesses fear that the decision will be irreversible, that they will no longer have the skills or capability to take back the service at the end of the contract.

Cost is also an issue. Many businesses worry that once they are in a commercial relationship with a sophisticated outsourcer they will be “out-gunned” and end up over-paying.

Some businesses are concerned about being disloyal and unfair to their staff and want to protect them and their jobs. Similarly, a key sticking point can be the fear of bad publicity. This is typically linked to job losses or moving work offshore as a result of outsourcing.

The first three concerns (loss of control, fear that it’s irreversible and cost) can typically be addressed by contracting in the right way. Regarding the people and PR issues, these can be managed in various ways – many deals include staff transfers or re-training provisions.

On that same tack: Is an outsourced IT department a good option for any business? For example businesses that already have highly skilled staff, or that have a strong company culture that may be affected by part of the team being outsourced?

The question of whether to outsource is always very particular to the specific business and circumstances. The question to answer is ‘what is the business case?’ (in a broad sense, including capability, sustainability, risk and financials) for outsourcing versus retaining an in-house option. Outsourcers have no “secret sauce” – it is generally at least theoretically possible for an in-house function to deliver anything that an outsourcer can. The question is always “will they deliver in practice and which option is more likely to succeed?”

Highly skilled staff and a strong company culture may well be reasons why it would be hard to make a business case in favour of outsourcing. Each case should be assessed on its merits.

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...that'sweird...I'll just walk into the city and see what's up...[/caption]

A study from Leiberman found that in 62 per cent of cases outsourcing cost more than originally planned, what are three strategies that businesses can implement to avoid this? And for what reasons does this happen?

Cost overruns will happen for a number of common reasons. For example, poor initial planning and analysis often means that initial costs were underestimated and drivers of future costs insufficiently understood. Similarly, poor or (often) over-complex charging mechanisms in the contract can mean it is difficult for a client to understand and control charges. Another factor can be a lack of active client management of the arrangement, which leads to loss of control.

The strategies to avoid this include spending sufficient time upfront producing a detailed cost model of current and future services, and modelling in-house and outsourced scenarios. This will help businesses know how they will compare in different circumstances.

Businesses should also negotiate a clear, robust contract with strong change control and clear charging mechanisms, and model scenarios so that they know how charges will change in different circumstances.

It also helps to assign a dedicated contract manager or management team, with the skills, experience and remit to manage the supplier. If businesses leave this all to the supplier, they are asking for trouble!

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Empty london, outsourcing

...damn outsourcing[/caption]

Lastly, what are there any situations when businesses should definitely outsource a team?

There are NO examples where you should definitely outsource a team! However, examples where businesses should seriously consider whether outsourcing might be the best option for them would include where in-house teams have continuously failed to deliver what the business expects, and remediation efforts have failed.

Outsourcing might also be used in functions where businesses are struggling to attract and retain and motivate high quality staff, for example, the maintenance of old technologies. It is also appropriate when the outsourcing market has specific, leverage-able assets or capabilities which provide cost or efficiency advantages which the business cannot replicate in-house, such as cloud-based services or offshore resources.

Equally, outsourcing can be beneficial when a major investment is needed in order to make a change. That investment can be funded by the outsourcer and/or shared with other clients. Finally, in some organisations, there is simply a philosophy to focus only on their core functions and to outsource everything else.

Thanks to Rick for chatting to us, you can find him on Twitter @SimmondsRick