Outsourcing background—and pitfalls


Worldwide IT spending peaked in 2013, subsequently decreasing steadily until 2016 to levels seen earlier in 2009-2010. Predictions are that spending will resume its historical upward trend in 2017, expected to reach $3.5 trillion, with some twenty percent of that focused on IT services. IT spend has also reached a tipping point where spend on cloud and cloud support now exceeds that on "traditional" IT. The accelerated pace of technology and ease of acquisition make it all the more urgent that a structured, transparent, IT sourcing process be in place, encompassing both products and services.

Yet it is unclear how much business advantage is actually being generated. Some observations on the current state of IT:

  • Roughly two thirds of IT budgets are spent "to keep the lights on."
  • One half to as many as two thirds of IT projects—irrespective whether internal or by outside providers—still fail.
  • Despite the recent retrenching of IT spend, the steady growth of outsourcing over time is based on the assumption that cheaper rates equate to a lower cost to achieve an underlying business objectives. This has given rise to compulsive outsourcing—lacking an integrated plan, strategy, or management—to address tactical needs and "commodity" skills in response to the legitimate desire of corporations to:
    • Focus on core competencies.
    • Optimize process efficiency to reduce the cost of doing business.
    • Deliver product to market faster.

Eight primary factors contribute to failed outsourcing:

  • Outsourcing decisions made independent of business strategy, creating outsourcing relationships incompatible with the business results expected.
  • Outsourcing decisions which ignore interdependence with other internally and externally provided services. There are very few autonomous services within an organization.
  • Outsourcing with the expectation of reduced rates through economies of scale. Economies of scale are generated when customers agree to follow standardized practices. When enterprises find they cannot adhere to a standard offering, they wind up paying a premium for flexibility.
  • Creation of contractual service levels without a supporting governance process.
  • Contract negotiations which fail to consider success factors and supplier viability.
  • Caring only about cost in pursuing an outsourcing relationship. Factors such as capability, cultural compatibility, relationship management, and strategic advantage often prove more important in the long term.
  • Creating agreements without considering that business circumstances change, therefore needs and requirements.
  • Establishing an outsourcing relationship without considering the internal skill sets and staffing necessary to manage a relationship with an external service provider.

Our mission? To structure IT sourcing in a structured, predictable, manner to avoid these pitfalls.

We invite you to view our presentation and white paper on client-supplier outsourcing viability and success.

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