The 1990s saw the steep ramp up of IT outsourcing, particularly to India, and from around 1998 a whole new industry - business processing outsourcing (BPO) was spawned, where operational processes were outsourced. India has perhaps been at the forefront of these waves followed by countries in SE Asia and Eastern Europe.
Uncertainty governs the world in which organisations operate, regardless of whether this is at an institutional, regulatory or political level. All too often the outsourcing debate focuses on the micro aspects of the decision - the quality metrics and so forth. While these are no doubt critical, the larger strategic picture, together with the issues and risks, require equal consideration. The key is implementing a flexible strategy that enables relatively quick operational changes. This is hard to achieve, but increasingly vital for success.
It has become unfashionable to state that one of the paramount drivers remains cost, but this is an absolute given in the current economic environment. What I would add is that a primary focus for firms is to change the nature of the cost - from fixed to variable. Another imperative is to lower capital expenditure - why build when you can buy? Even better, evaluate a BOT (Build, Operate, Transfer) model and to a large extent move the setup risk to the vendor.
Decisions need to be taken at both a strategic and tactical level; for the former, the firm’s business plan over the next few years, the potential geographic spread, the nature of the business that ITeS serves etc are key. The latter addresses issues of reducing cost, maximising assets utilisation whether it is infrastructure, software, people; and reducing reputation and execution risk when outsourcing.
Key drivers
The compelling business rationale to pursue a decision to outsource across a swathe of industries remains more efficient delivery, quicker response to changing business priorities and the lowering of per unit transaction costs. Mitigating all manner of risks is of course the umbrella driver.
If one classifies the key drivers (Figure 1) under cost and flexibility, rationalisation, focus on core competence and revenue maximisation we see a fairly coherent set of objectives to consider. What is vital is that each company evaluates and ranks these in order of priority.
Figure 1
Criteria for outsourcing
What to outsource and the stages in which this is achieved is important for success and covers factors such as the business, the regulatory environment, the desired level of control and oversight, the technology landscape and nature of development.
For business stakeholders, the extent to which the application / process is critical is paramount. The more critical or complex the business area the higher the risk when considering whether to outsource or not. Functions that have a high level of intellectual property or require extensive experience are also less likely to be outsourced.
Regulatory implications, if a process or data is to be executed / stored remotely, must be evaluated, and legal and compliance must be involved at the outset of the outsourcing analysis to ratify that the process or application can be located in another jurisdiction. This decision has a bearing on supervisory and regulator’s rights, the compliance risk to the firm and so forth.
With technology, a level of usage and its stability across the firm / business group would imply greater ease in outsourcing given the availability of skills and resources both within the firm and in the external environment. Also the cost of ownership of the technology - licensing, annual maintenance, costs of helpline and development staff will also affect the sourcing decision. If the cost of ownership of a particular technology shows a decreasing trend it is easier to outsource the particular technology application / process.
The broader, or more pervasive, the use of technology, the stronger the reason to outsource.
The outsourcing decision
It is imperative that the formulation and implementation of the outsourcing strategy is done together with the business. The IT strategy must dovetail with the business plan that spells out new product launch, geographic coverage, delivery systems required etc. All these will impact ITeS resources and hence the outsourcing strategy.
Often the Technology and Operations department together with their bête noire, the Sourcing Office, work in blissful ignorance of how the business over the next 12 to 18 months will affect their outsourcing plans, leading to a disconnect between the global sourcing office (who plans the strategy), and the ITeS business units.
Is this a long-term strategic play, or is it short-term and tactical; the scope of the strategy - is it global, does it encompass all business lines, or is it limited to a particular business or legal entity etc. Though these largely remain similar across companies, their focus, priority and hence combination into a strategy, differ.
Next is the decision on the vehicle for execution - will it be in-house (captive), co-developed with a partner (could take the form of a joint venture or BOT etc.), or a pure outsource to a partner either by project or to a larger scale offshore development centre. There are of course flavours to these basic models, each with their pros and cons, and the firm must analyse and identify what is best for it in the given circumstances. The basic goals for outsourcing need to be mapped to the decision.
The issues of location and the risks that any firm’s outsourcing strategy ought to consider will include political and external stability, the regulatory and legal framework available, corporate governance standards, tax and other financial incentives, capital mobility, labour law and corporate ownership laws.
Next, evaluate sourcing models for implementation and compare and rank them on various criteria. Though by no means exhaustive the criteria in Figure 2 identifies what is perhaps important to evaluate, rank, and assign a weightage factor for a firm, given its own particular set of circumstances.
Figure 2
Risks
The risks to be considered in any sourcing decision are interdependent and can be classified in a variety of ways. One such classification could be:
- Strategic risks;
- Environmental (external) risks;
- Operational risks;
- Vendor risks.
These are detailed in Figure 3
Timing sourcing decisions
Timing the decision has a bearing on success or sub-optimal benefits. There is no absolute rule, but it is perhaps a good strategy to outsource in incremental steps, beginning with non-core systems in on a project model.
This can well grow into an offshore development centre model. The next phase is a significant step as it assumes core business critical technology and a model which may encompass a joint venture or equity stake by the client.
Figure 4
In conclusion
The wheel has turned full circle, what with the current shenanigans in the market and world economy. We will see a sustained interest in firms including outsourcing as a key element of their business strategy.
The caveat is that firms will need to clearly understand their strategic drivers, understand how they can best leverage these while minimising risk. In short, know why they are outsourcing, set about the model that best fits and gives the maximum benefit for a given level of risk.
