To outsource or not, is that the question?
- 30 April, 2004 22:00
Last issue I raised the paradox of IT outsourcing. If it is such a good idea, why are so many organisations disappointed with the results? To a large extent I think it is because many organisations are unclear on why they are outsourcing and the particular things that should or should not be outsourced. A commonly heard mantra is, ‘We should outsource things that are not core and keep in-house those things that are.’ In other words, an opportunity cost approach.
This begs a very important question – how do we define what is core?
For many organisations the answer is built on faith or ingrained belief rather than on analytical assessment (be it quantitative or qualitative). If we agree to keep in-house core things and outsourcing things that are not has some value, then doesn’t it follow we need a good way to define what is core?
For many IT organisations embarking on an outsourcing journey, this first step is often where the trouble begins. With sometimes little more than a finger in the air or a “gut feel”, major outsourcing decisions are made and sometimes the baby ends up being thrown out with the bath water!
Effective decision making
How can we make these decisions in a more effective manner? To help our clients who are considering going down this path, we employ a number of models. Our IT value chain model allows us first of all to catalogue and categorise the functions an IT shop undertakes. This model is designed to expose each of the major customer facing (primary) and non-customer facing (supporting or enabling) functions of an IT shop.
We then run these functions through a set of filters (some of which are based on the work of Peter Keen) to: Assess them in terms of their impact on a business or its customers; and assess them in terms of the value that they generate or destroy.
When we run each IT function through these filters we end up with a matrix illustrating customer/business impact against value created or destroyed in delivering a function. The general idea is: Keep in-house those functions that define you in your customers’ eyes or are critical to everyday performance and which generate value; and look to outsource those functions that are performed in the background and which destroy value.
The results from these first two exercises are then sanity tested against a variety of environmental factors (some internal and some external) to ascertain the feasibility of the preliminary sourcing decisions. Final sourcing decisions are then made. Does this kind of approach yield better answers than a “gut feel” approach? In many cases, surprisingly so.
The value of this approach is, not only does it force IT to confront itself in the mirror and ask itself some difficult questions, but also to go through a disciplined process to come up with the answers. Rather than using outsourcing as a means to hopefully deliver the right answers to these questions, it makes a lot more sense to have a quality process determine the answers to which outsourcing can then be applied as appropriate.
Aaron Kumove is managing director of Horizon Consulting.