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Outsourcing – BPO & IT Outsourcing

Nailing jelly to the wall: Nick Mayes, PAC

Many IT services relationships set out to deliver innovation, but in practice it is a goal that is difficult to achieve and even more complex to quantify. Restrictive contract frameworks and differing expectations between the client and the supplier often get in the way of clear and measurable innovation. One experienced buyer of IT services recently told PAC that: “Innovation in IT services is an oxymoron.” A complaint we often hear in the user community is that while their external services partners normally deliver on basic service level agreements (SLAs), they seldom go that extra mile in terms of bringing new ideas or different ways of thinking to help users tackle their business challenges. But the problem is – what should this extra mile include and how can customers incentivise vendors to deliver it within the framework of a commercial contract?

View from the trenches: Malcolm Swallow, EquaTerra

UK IT executives responsible for their organisations’ outsourcing strategy say they are more satisfied than ever with the results being delivered through outsourcing. They are also becoming increasingly confident at managing outsourcing contracts and are likely to outsource more in the future – all at a time when technology budgets are restricted and the focus is firmly on achieving cost savings. These are some of the key findings from the recent EquaTerra UK ‘Service Provider Performance and Satisfaction’ study (see Box, next page). Participants in the study rate their outsourcing service providers on a selection of key criteria; they only rate those providers that are currently actively delivering services to their organisation. The study does not seek to establish anything as absolute fact (as perceptions are by definition subjective), but to report on the feelings and broader perceptions of key decision makers regarding the services supplied by their outsourcing providers.

Fine tuning your financing: Simon Tennant, PA Consulting

It is a widely held belief that outsourcing is a good way for companies to fine-tune the running of their organisation and save money. The problem is that developing and rolling out a full strategic sourcing plan will not secure you significant cost benefits in the short-term – typically, these benefits appear in the mid-term. So for organisations looking to deliver short-term cost savings, the most effective course of action is to simply make the best of the sourcing structure already in place. However, this should go far beyond squeezing the best value out of the various suppliers, to reviewing what is included in the existing sourcing structure and how to get the best out of existing relationships. Through ‘good housekeeping’ you may discover opportunities to reduce the costs of your sourcing arrangements in the following areas.

Multi-sourcing makes its mark: Cliff Mills, NCC Research

Outsourcing in its many guises is now established as a viable option for any organisation. These days, many companies have considerable experience of outsourcing and are better able to negotiate a deal that will deliver real value and benefits to their business. For their part, the suppliers have shown themselves capable of developing more flexible solutions in what has become a much more competitive market and the choice of options has never been greater. The broad range of IT functions that potentially can be outsourced is highlighted in this year’s Evaluation Centre survey. The most popular are website & e-business (54%), followed by application support & maintenance (45%), wide area support & operations (45%) and software development (41%). The areas likely to see the strongest growth in the future are data centre operations (18%), desktop systems (13%) and security (11%). In the early days of outsourcing, it was very much the case that organisations would seek out a single supplier to take over their IT operations. Now only 14% of companies favour this approach and as outsourcing has become much more sophisticated, the majority (69%) prefer to choose different suppliers for different outsourcing requirements.

Is outsourcing really working?: James Cockroft, Xantus

While the UK may be starting to rise out of economic recession, the recent financial crisis and the ensuing large rise in national debt will leave a severe burden on the public and private sectors for many years to come. Indeed, the Government has already admitted that the public sector is facing impending and significant efficiency savings, which will include cuts in spending. Many private-sector firms have felt the impact of reduced income and tightened lending, leading them to scrutinise all aspects of their business. IT delivery is not immune to this financial pressure, and so from national and local government through to big business and SMEs, today’s principal IT challenge is to reduce costs, whilst maintaining or even improving service quality. For large organisations, an obvious place to start is their current sourcing arrangements, and for many this means scrutinising any existing outsourcing deals.

Cutting to the core:Kimball Bailey, Iebe Ypma/Alastor, Rory Graham/Coffey Graham

Outsourcing is now a mature business. For many years, users have outsourced what they see to be commodity services – both IT and business processes – to external suppliers, with varying amounts of success. Now there is a growing desire for users to explore the outsourcing of non-commodity business processes (those value-added elements that can often differentiate the organisation) and, in some cases, to create an increasingly virtual business. But what is the basis for such an outsourcing decision and what business risks and contractual issues are associated with it? As IT has matured, the focus of user organisations – in terms of the way in which they see value delivery from IT – has shifted up the ‘maturity model’. Initially, businesses used IT to automate and reduce the transaction costs of commodity processes, such as order and invoice processing. The focus then moved up the scale to the provision of new, value-added services – risk portfolio management, project planning, or shared service centres.

Solving the value equation: Craig Nelson, ProBenchmark

Even the savviest buyers of outsourcing services can struggle to measure the value they have obtained. Often, the intense initial focus on cost makes it difficult to assess outsourcing’s real impact on the organisation, as well as how well (or badly) the organisation is embracing the new sourcing operating model. One global insurance company described its sourcing experience as ‘Swiss cheese’. Four years into the deal, many services had been excluded out and new service structures had evolved. With so many changes, the contract was filled with so many holes, it looked like Swiss cheese. This phenomenon is not uncommon. Companies that do not regularly evaluate the four key quadrants of sourcing performance often find that 40-70% of the original contract value has been lost. But most disturbing, they don’t even know it and continue to pay for services they are not receiving. This is not the providers’ fault. The lack of a vendor management structure and poor contract and relationship management contribute to value leakage.

Virtues of virtualisation: Martyn Hart, National Outsourcing Association

At the start of this year, the NOA predicted that 2009 would be the year that virtualisation bursts into the outsourcing industry. Analyst firms including Gartner have backed this view, predicting a 55% increase in revenue within the EMEA virtualisation software sector during the course of 2009. Europe is indeed leading the way in adopting virtualised technologies, with Gartner figures showing that the UK, Germany and France represent 89% of the total EMEA virtualisation revenue. Based on the evidence, it is clear that more organisations than ever are switching or considering switching to virtualised platforms. So why this surge? The main reasons why businesses switch to a virtual world are cost savings, space savings and green improvements.

The answer's outsourcing – what's the question?: Richard Williams, Procertis

Outsourcing is about taking something that isn’t your organisation’s core competence and getting a specialist to run it more efficiently. The essence is to try to take advantage of that specialist provider’s knowledge and economies of scale to improve performance and achieve the service you need, usually at a lower cost. There are many reasons why organisations decide to outsource. Often it’s a question of cost, but there can be other drivers. A common mistake is to outsource something that’s perceived to be ‘broken’ in the hope that the outsourcer will be able to fix it. Frequently all that happens is that you shift the same problem to somewhere else. The problem doesn’t get fixed at all, it simply takes on a slightly different flavour. As with many things in life, it all boils down to knowing exactly what you want to do and why you want to do it.

Being more human: Barbara DeGuise & Charles Rosenfield, Alsbridge

To meet the business objectives of an outsourcing project, the company’s operating processes and organisational designs must change for the good of the emerging, more efficient business model. You may be a small business seeking help with tasks that require only part-time attention, or a medium-sized firm buying a mature, commodity service. But in either scenario, someone in your company will wonder why their job has to bear the brunt and ask: why not outsource someone else’s job? The decision to co-source or outsource is complex and always requires an assessment of current operations, a review of the candidate processes, and a meaningful savings plan. Those savings can come from process elimination, increased efficiency and the oft-resulting reduction in labour.

Being human: Barbara DeGuise & Charles Rosenfield, Alsbridge

Outsourcing is an important, results-oriented vehicle for improving efficiency, lowering operating costs and establishing a leaner re-skilled organisation. But as with any major change, those people worried about its impact on them often work against its objectives. Any outsourcing deal involves change for both the user company and the provider. And some degree of confusion, fear and uncertainty can be expected when two complex entities are joined together. For employees of the group being outsourced, these emotions are intensified by a legitimate concern about their future employment. Whether the outsourcing provider wishes to establish relationships with a retained team or absorb the client team into its own organisation, it will only be successful if it involves HR, assesses employment issues in the earliest stages of the deal, and communicates honestly with existing and new staff. The alternative is unhappy employees and a diminished value from the service that the provider has worked so hard to acquire.

Crunch time for outsourcing: Mike McCormac, Procertis

There’s a lot of debate going on right now about whether to outsource, what to outsource and why. Every organisation is facing new pressures to reduce costs in their totality and at the same time get flexibility into a fixed cost base. On the face of it, outsourcing is the answer. Well, outsourcing is certainly an answer, but it depends what the question is. Many organisations have inbuilt inertia…it’s done that way, because it’s always been done that way. But the pressures businesses are facing now mean it’s a really good time to start asking some much harder questions. Those questions start with, ‘What is the business trying to achieve – what’s our strategy?’ From there, it’s a natural progression to, ‘What do we need to do – what processes do we have to make our strategy succeed?’ In turn that leads to, ‘What IT systems do we need to make our business processes as efficient as possible?’

Mature model is best: Chris Waite, Fujitsu

Application outsourcing has been around for a number of years and, as with anything that involves relationships with people and technology at multiple levels, the results have been mixed. Many early cases were characterised by problems such as poor governance, unclear expectations, lack of innovation, inflexible contractual arrangements and a focus on technology. Despite this, application outsourcing continues to thrive, with more and more organisations striving to meet ever more challenging financial and business objectives. And the knowledge and experience gained from early relationships has led to a more mature model developing, based on a better understanding of the value of applications to a business and focusing on shared objectives, innovation, transformation and – most importantly – business value.

Cutting corners: Lee Ayling & Tim Amatt, EquaTerra

To view governance as an unnecessary cost, or anything other than being an integral part of an outsourcing deal, is a major mistake – especially since outsourcing contracts can be worth hundreds of millions of pounds, and failure to appropriately address effective outsourcing governance can see the value of an outsourcing relationship drop by as much as 50%. To be fair, outsourcing governance is becoming more valued than it used to be. Once considered an afterthought in the process of negotiating and implementing an outsourcing contract, it is now much better appreciated. However, an understanding of its true value remains far from universal amongst organisations with contracts in place – and this is concerning. Partly the problem stems from a general lack of understanding as to what outsourcing governance actually means. Put simply, it refers to the management of an outsourcing contract to ensure that the agreement between the buyer and service provider achieves its goals.

Pushing the pedal: Andrew Burgess, Orbys Consulting

There have been many changes in the outsourcing market since Orbys was founded some 15 years ago. But only recently, and particularly in the last few months, have we seen so many conflicting market and business pressures being applied to the sourcing process, that we now believe the traditional approaches are no longer viable. CIOs and CFOs are demanding sourcing programmes be delivered quicker than ever – yet the increased complexity of the business environment, with new technologies, increased regulatory requirements, smarter vendors and comprehensive-butflexible contracts, means that compromises are often made in the sourcing process, resulting in deals that are bad for both the customer and the vendor. In effect, the current business environment is squeezing the sourcing process on two conflicting fronts.

Coming of age: Dominic Trott, Pierre Audoin Consultants

The public sector were once known as laggards in their approach to IT outsourcing but this is no longer the case. A succession of reports and initiatives, channelled into spending policy, has meant that what was perhaps an immature approach to IT outsourcing has been forced to do a lot of growing up in recent years. In particular, the local government sector has been faced with challenging targets for cost savings and efficiencies. And once initial steps such as outsourcing infrastructure, applications and business processes have been made, this area is being forced to innovate in order to generate further savings. Following the Comprehensive Spending Review period of 2004 (CSR04), during which £22 billion of savings were generated within the UK public sector, CSR07 called for a further £30 billion of savings to be made. With the upcoming Operational Efficiency Review, for which ‘back office/IT’ is one of three threads of investigation, this figure is set to grow even higher.

Portfolio investment: Eric Simonson, Everest Research

As companies increasingly adopt IT outsourcing (ITO) and business process outsourcing (BPO), they are becoming more sophisticated in the way they select the right supplier for the work being outsourced. And as well as ensuring their existing suppliers perform successfully, organisations are also starting to determine which set of suppliers are best suited to meet their future as well as current needs. This kind of ‘supplier portfolio strategy’ has three typical benefits: simplicity of managing outsourcing efforts; deeper relationships with a core set of suppliers; and financial savings from limiting investments in managing multiple relationships. In terms of simplicity, the increased adoption of ITO and BPO inevitably creates more outsourcing relationships, so naturally executives are starting to ask “Can we use fewer suppliers?”. This question is motivated not just by the number of service providers – in large enterprises, often several dozen – but also the recognition that outsourcing is complicated, and having fewer suppliers can help simplify business.

Behind closed doors: Jean-Luc Bressard, Vector Advisory Partners

The recent high-profile UK data privacy breaches by several agencies of her Majesty’s Government have highlighted the importance of securing data before moving into an outsource or offshoring contract. Behind this lies the European Parliament Directive designed to give all citizens of the European Union privacy rights, particularly in relation to the processing or their personal data. But this primary legislation has thrown up some serious challenges in its application and interpretation at localised levels. National enabling legislation has indeed led to confusion and discrepancies between member states’ interpretation of the directive – making a multi-geography offshoring or outsourcing programme rife with complexity in terms of data privacy compliance. The issue is further compounded by the need for the service provider to ensure that client confidentiality (distinctly different from data privacy) is also maintained.

Standards delivered: Lynda Cooper

IT service management (ITSM) is the running of IT services to deliver value to the business – and given that services operations can consume up to 80% of an organisation’s IT budget, it is essential that this is managed well. Just as project management is used to manage projects, so service management is used to manage services. But it is important to note that service management is not about designing and building the actual hardware, software, applications or tools – this is done by a project. Instead, service management takes the technical product and manages it as a service that can be delivered to the customer to support the business. Focusing on outsourced IT service management, best practice is encapsulated in two main standards or frameworks.

Seven deadly issues...: Amanda Vaughan & Tony Haigh, Analysys Mason

Ask the question, ‘why do we outsource?’, and generally people will answer ‘to save money’ or ‘to achieve a better service’. The view, perpetuated by outsource suppliers, that businesses should avoid involving themselves in non-core activities because they are outside their area of core competence can also be supported to some extent. Other arguments in support of business process outsourcing (BPO) in particular, are based on keeping an organisation nimble. By outsourcing its IT, a company only has to pay for what it needs at that point in time – transferring large fixed costs to changeable variable costs. The company can also adapt its IT processes at much shorter notice following latest best practice. Given these drivers, there are seven key issues that businesses should consider when outsourcing. This article reviews the pitfalls involved in each, and how to avoid them.

Knowledge for sale: Shamus Rae, KPMG

Outsourcing and offshoring continue to develop as important business strategies. But while organisations are still trying to master IT outsourcing (ITO) and grapple with business process outsourcing (BPO), along has come a new industry trend: knowledge process outsourcing (KPO). KPO, also referred to as ‘knowledge services’, is different to more traditional outsourcing offerings and approaches in that it cuts into the main core competencies of many organisations. What’s more, while cost reduction seems to have been the prime motivator of the ITO and BPO waves, ‘intellectual arbitrage’ appears to be the main driver with KPO. Various research sources suggest the KPO industry will be worth anything between $10 billion and $17 billion by the year 2010. So while the level of optimism on industry growth varies, few doubt the fact that the industry will grow at a staggering rate. The financial services sector accounts for a major proportion of the KPO industry. Based on KPMG’s recent study Knowledge process outsourcing – Unlocking top-line growth by outsourcing the core, we expect the financial services KPO industry to be worth more than $5 billion by 2010.

Fighting failure: John Regan, BluePhoenix Solutions

Outsourcing IT application development and testing work is increasingly becoming the norm for many of Britain’s largest companies. However, not all of these deals deliver the desired benefits for either the company outsourcing the work or the service provider. So where do the problems lie, and what can be done about them? One reason why IT outsourcing deals fail is that when large UK companies enter into business with other firms, they are used to being the dominant partner. They generally set the terms under which business is conducted and also feel they have the upper hand if any disputes ever arise. But large outsourcing deals are different. The scale of the work makes it impossible for one side to be dominant if any financial benefits are to be achieved. For example, a problem recently arose between a major UK bank and its IT supplier. The two companies had a clause in the contract between them which clearly stated the supplier had to provide an additional service at an already agreed price. However, on reflection the supplier decided for various reasons that it was not prepared to carry out this additional service.

Heart of the matter: John Dean, MLG Management Consultants

There is genuine interest in the potential benefits that business process outsourcing can offer companies eager to find ways of remaining competitive. However, in many ways BPO is still a relatively new and immature field. Many vendors spin convincing tales of ‘best of breed’ delivery capabilities and all the significant benefits they can help businesses achieve…well, caveat emptor! Yet there are undoubtedly many benefits to be gained from a successfully outsourced business process – whether that process is the company’s IT infrastructure, its customer interaction centre, one of its distribution or manufacturing facilities or its distribution fleet. The oft-quoted adage of sticking to one’s knitting has its attractions. Running computer departments or fleets of vehicles and warehouses isn’t a manufacturing company’s game and there are specialists who can do this better/cheaper/faster for you. But companies can be enticed with the promised financial benefits to the extent that they lose track of the many risks associated with divesting operational responsibility for a key process to another organisation.

Reaping the rewards: Malcolm Swallow, EquaTerra

Outsourcing is increasingly becoming an everyday tool for organisations looking to gain advantage in today’s competitive environment. It is one of the options available as companies look to adopt strategies that enable them to deliver the same service or output – cheaper, better and faster. Outsourcing is not a phenomenon that will come and go; it has effectively been around for many decades and will be with us for the foreseeable future. The UK, in particular, has not only seen some of the largest outsourcing contracts in the world but is also one of the most diverse and mature outsourcing markets. Outsourcing, in some form or another, is now part of most UK organisations and the exploitation of this business model is becoming a core skill. With this comes changing market dynamics. New entrants, the rise of niche players, global sourcing, business process outsourcing and multi-sourcing are some components of this change that are having a dramatic impact on the range of solutions available to client organisations.

Poles apart?: Hugo Minney, Minney.org

Return on investment is crucial in any outsourcing contract. But how do you use ROI to make the right buying decision? Having worked on both the supplier and buyer side in IT contracts, one major stumbling block is that the salesperson and the buyer involved may have completely different viewpoints – they may not even calculate ROI using the same units. Take, for example, a decision to outsource IT services. There’s a cost involved: the capital cost of purchasing equipment and legal fees; the cash cost of parallel running; the time cost in effecting the transition; the risk cost in understanding the processes and matching the culture. The service provider involved will have its own way of measuring the price of these inputs, both its own and the client’s inputs. But the client may measure only its own costs using its own measures, or make some assumptions about the ways the supplier is measuring.

Winning and losing: Eleanor Winn

Why do some outsourcing arrangements fail? And which factors have the greatest influence on their success? A report from sourcing consultancy Quantum Plus and international law firm Bird & Bird published last year examines these questions. The report – based on interviews with experienced practitioners in customer and service provider organisations in both the public and private sectors – highlights the fact that companies can make an important difference to the success of their outsourcing by maintaining strong relationships throughout the lifetime of a contract. Continuity of personnel, strong governance and alignment of expectations are also key hallmarks of success. In fact, the survey confirms what outsourcing practitioners have always known – that while companies contract with companies, it is the relationship between people that leads to success or failure.

Doing business with an 800lb gorilla: David Butler, Triple IC

Recently I was working with a very experienced and capable CIO, studying his outsource contract. He was unhappy with the supplier’s performance. So I did the obvious thing. I looked at the supplier’s performance against the contracted service level agreements. I then felt obliged to tell this CIO that his supplier was regularly hitting and sometimes exceeding the agreed SLA targets. On this basis alone, there was little to complain about. Nevertheless the CIO wasn’t persuaded. “Whatever story the SLAs tell, I’m still not satisfied,” he said. “I still don’t think I’m getting value for money. And, more to the point, neither do my CEO and my CFO.” The outsource supplier’s team were working flat out to ensure they met the agreed levels of performance. They didn’t respond well to being told they were doing just that – but it wasn’t enough. And who could blame them?

Sourcing vs subscription: Sukhendu Pal & Lisa Hammond, Centrix

Sourcing is the process by which companies procure the right products and services for the best value. Using this approach, the buying company analyses what it’s buying, what the market conditions are, and who can provide those goods or services. Historically, the buyer then uses this information, together with innovative contracting techniques, to find the best prices available in the marketplace. Companies today have many sourcing options. At one end of the spectrum are the various ‘insourcing’ alternatives. A company can, for example, make a particular capability in a traditional business unit, or it can source it from a separate part of its business. It can also establish a captive offshore operation (such as HSBC’s processing centres in India). In all of these cases, the company owns and operates the source. In the middle of the spectrum are joint ventures. A company can draw on managed services programmes for some capabilities it needs, tapping an external service provider to take over an internal function, or it can partner with other companies to create a mutual capability. In each case, the ownership and operations are shared.

Future of outsourcing?: Simon Scarrott, Compass

The worldwide growth in outsourcing means that ensuring value for money in outsource contracts – once the preserve of senior managers – is now a key challenge for many corporate executives. Traditionally, companies have considered contractual benchmarks as a vital means of establishing value, in terms of fair market pricing in the context of industry and market standards. However, most benchmarking exercises offer only a limited perspective of value; they tend to exclusively describe value in pure financial terms at a single point of the contract term – rather than over its full term. So while benchmarking is fundamental to ensuring competitive market rates, it is not, in isolation, a sufficient foundation for a better and healthier outsourcing relationship over the long term.

Buying power: Chris Thornton, Orbys

Outsourcing suppliers used to have an enviable amount of power. Back in those early days of outsourcing in the 1990s, with no experience to guide them, customers often became locked into five-year, 10-year or even longer mega-deals. The deals they signed were too rigid to adapt to the inevitable business changes, but the consequences of pulling out of a soured relationship could be punishing. Those early entrants to the outsourcing world have now emerged – perhaps a bit battered round the edges – with a far clearer picture of what they want from an outsourcing partner and deal. The balance of power has shifted firmly towards the customers’ side. They are making smarter choices, and they are forcing suppliers to be smarter in the services they offer and the approach they take to working with clients.

Source of success: Douglas Peden, Osborne Clarke

There have never been more processes and services outsourced than there are at the moment, yet there is still a fear of outsourcing. Concerns range from the problems of data security and loss of strategic control to the cost of making redundancies and bad publicity. When an outsourcing or offshoring deal fails, the problems can take many months and even litigation to solve. As such, businesses need to consider a number of areas carefully before progressing. As with anything, it is vital to ask the right questions in order to check the viability of an arrangement. It is also sensible, at the very start of the process, to identify the potential problems you may encounter in outsourcing certain types of service, as well as the possible solutions to them. All this could help you avoid disputes in the future.

Art of apps management: Dominique Raviart, Ovum

Companies are increasingly awarding their application management contracts in a pragmatic manner. They consider application management based on whether or not they have the right skills internally; on the type of work they want their internal IT staff to perform; and on how much they need to save on their maintenance budget overall to fund the implementation of new applications. This pragmatic approach is fine as far as it goes, but is not good enough: users need to retain their pragmatic approach and enrich it with a governance point of view. They should consider the following questions: what is the role of my internal IT staff with regard to application services?; how do I break my application management contracts into manageable pieces?; what application strategies should I put into place?; and how do I ensure co-ordination and standardisation between contracts?

Made for sharing: Arun Aggarwal, TCS

The instinct to ‘outsource everything’ to a single supplier can be appealing, but it is often a less effective strategy. Thanks to an increasingly mature market and improved management tools and techniques, the trend is increasingly towards multi-sourcing as the model of choice for modern global business. Multi-sourcing increases the complexity of the supply chain and relationships with supplier organisations, so it’s not suitable for every organisation or process. However, with careful implementation, it has the potential to reduce cost and risk, and provide easier access to the best suppliers for a programme of work. The future of outsourcing will truly be a shared one.

You can't outsource what you can't measure: Rupert Booth

Benchmarking is a valuable management tool for measuring and improving performance. Its application is extremely broad and can cover: identifying opportunities – benchmarks can be used to identify ways in which the company can be improved by asking ‘How are we doing?’, and identifying where activity costs are too high, or performance is lagging; identifying solutions – benchmarking can be used to focus on solutions to particular problems. These can be highly specific, such as the answer to a long-standing production problem; and identifying best practice – this type of benchmarking holds particular promise. It is more specific than asking ‘How are we doing?’ yet does not confine itself to seeking solutions to specific problems. The aim is to identify best practice in an important process of the company and incorporate this into a process of continuous improvement.

Out with the new?: Iebe Ypma, Alastor Consulting

Outsourcing used to be seen as a remedy for immediate cost, service or complexity problems. This approach has often led to disillusionment. By year three of such an outsourcing arrangement, customers no longer feel the contract is relevant to their changing business requirements, and the cost benefits associated with the initial financial engineering may have ceased. For longer-term success, an outsourcing deal needs to be: appropriate for the maturity of the function being outsourced and the organisation where the function is deployed; flexible, to reflect changes in business needs, the available technology and the maturity of the organisation being serviced; and innovation-friendly, to encourage innovation in cost reduction, scope, applications and infrastructure. This article focuses on the innovation issue.

Home cooking or takeaway?: Alan Woodward, Charteris

Most of us like to go out for an Indian or a Chinese meal. Yet deep down we know that home cooking is usually healthier and better for us, and ultimately a lot more cost-effective. The time has come for UK organisations to start applying similar reasoning when they develop software. You are probably aware of the opportunities for software development to be ‘offshored’ – meaning that the job of writing the software is outsourced to a development firm located away from the UK mainland, typically in India, China or Eastern Europe. Usually, you don’t need to look any further for the reason for offshoring than the organisation’s balance sheet. Because in theory – but often only in theory – software development carried out in these offshore locations is cheaper than getting the job done in the UK. The cost differential is based on nothing more dignified than the fact that software developers in India, China and Eastern Europe are willing to accept much smaller salaries than their counterparts in the UK and US.

Supply on demand: Ean Evans, Catalise

IT leaders are often tasked with the dual challenges of cutting the cost of service delivery while maintaining or improving quality of service. Outsourcing and offshoring are often seen as key instruments in achieving these goals. But as companies begin the outsourcing journey, they face several challenges. These include deciding which IT activities should remain inhouse and which should be outsourced, learning to manage relationships with one or multiple service providers, and deciding on appropriate performance metrics and service level agreements. Companies who implement an IT demand-supply organisational model as a stepping stone in this journey will have more success in their subsequent outsourced supplier relationships. In particular, this approach helps companies avoid two of the major causes of failed outsourced deals – namely, outsourcing a ‘problem’ area; and outsourcing too much function – leaving the retained organisation without the skills and competencies required to manage the relationships with suppliers and meet business needs.

Surviving renewal: Bahl/Rajpal/Tedakapalli, Everest Research Institute

Stakeholders in the outsourcing market have a huge opportunity and many challenges ahead of them because the outsourcing market is undergoing significant changes. This fundamental restructuring will have a direct bearing on the way buyers and suppliers structure deals. These changes are especially significant in light of the major renewal trend now underway. Everest Research Institute estimates that $118 billion of outsourcing business will be up for renewal between 2006 and 2008. With buyers and suppliers having already renewed $30 billion of that business at the time of writing, this leaves a total of $88 billion worth of business still up for grabs.

Procurement: BPO's new baby: Rachael Stormonth, NelsonHall

Just two years ago, if you spoke to a senior procurement executive about business process outsourcing (BPO) for procurement the chances are they would not be familiar with the concept. Yet today it is becoming a hot topic: some high-profile contracts are being signed and procurement officers are increasingly asking questions about procurement BPO. These questions typically centre on what it entails, who are the major service providers, what are the common commercial arrangements, what are the most significant risks and who are the early adopters. Back in 2004, NelsonHall research indicated that while it was a very small market, outsourcing of some aspects of the procurement function would boom, with take-up accelerating from 2007. In line with these predictions, we have seen some interesting contract awards in 2006, with more to be announced.

Social skills: Andrew de Cleyn, LogicaCMG

As outsourcing activity grows, companies are looking for more sophisticated ways to manage their expenditure, to ensure they get the best return on investment. A recent study by Warwick Business School has shown that well-managed outsourcing arrangements based on mutual trust can create a 20-40% difference on service, quality, cost and other performance indicators over outdated power-based relationships. The survey shows that CEOs who neglect to actively manage their relationships with outsourcing partners are missing out on a ‘trust dividend’ worth up to 40% of the total contract value. In trying to identify what makes for success in outsourcing, practitioners invariably highlight ‘relationships’ – but there are few precise findings on how such successful relationships should be developed. Good relationships don’t just happen: the overall strategic business intention must determine the nature of the relationship and the contract.

Divorce or marriage guidance?: Eleanor Winn, Quantum Plus

The high-profile decisions by organisations such as JP Morgan Chase, Sainsbury and, most recently, Powergen to bring their outsourcing arrangements back inhouse before their contracts reached full term have given rise to a spate of seminars, conferences and articles about ‘insourcing’. Is this the next trend in the sourcing marketplace? When faced with a troubled supplier relationship, lower-than-expected levels of service and failure to realise the predicted financial and business benefits, bringing it all back inhouse certainly looks appealing. But given that the move to outsource will have involved a level of financial and emotional investment, as well as integral organisational change within the retained company, should people be jumping aboard the insourcing bandwagon, or should they instead work on their existing relationship?

Dispelling the offshoring myths: Lisa Hammond, Centrix

Many organisations have struggled to achieve lasting value from offshoring. Although it’s often presented as a ‘no brainer’, successful offshoring relies on intelligent choices about what to offshore and how to do it. Key to this is having an understanding of the truth behind common offshoring myths, to ensure your sourcing strategy delivers real and long-term benefits for your business. For many years, offshoring was seen as a tactic for reducing the cost of back-room functions such as payroll and IT, and for much of that time it attracted little attention. This started to change in the late 1990s as companies began offshoring those functions – such as manufacturing, IT applications development & maintenance and call centres – that have a greater impact on customer service and top and bottom-line revenues. Suddenly, offshoring morphed into an item on the senior management agenda.

Outsourcing: a game of three parts: Simon Lindley, Orbys Consulting

Outsourcing has matured significantly over the last few years. Much has been written and plenty of lessons have been learnt about the dangers of poor outsourcing agreements. Problems still arise and major headlines are made by ‘legacy’ deals that were made on the golf course or on a CEO’s handshake, without proper attention to contractual terms such as suitable exit provisions and protection over change control. And some organisations may still blindly accept suppliers’ standard terms or fail to take adequate support on the contractual requirements – but thankfully most now take suitable care over the development and negotiation of the contract. So outsourcing is now a proven route to deliver value and all the problems are being managed? Not quite…

Hints and tips: Steve Emmett

Outsourcing has been part of the business world for over half a century but despite its perceived maturity there are always aspects that can be improved, particularly in the pacesetting area of IT sourcing. The art of making your outsourcing deal successful is like any other activity; it needs to be thought through with care. Whilst the market is mature, most companies who outsource do so for the first time with little experience and a view that they are only trying to save money or focus on their core activity. Talking to existing users, suppliers and independents will allow you to gain the knowledge needed to avoid the common mistakes.

The power of relationships: Andrew de Cleyn, LogicaCMG

A recent study by Warwick Business School shows that well-managed outsourcing arrangements based on mutual trust can create a 20-40% improvement in service, quality, cost and other performance indicators over outdated power-based relationships. The study also shows that CEOs who neglect to actively manage their relationships with outsourcing partners are missing out on a ‘trust dividend’ worth up to 40% of the total contract value. In trying to identify what makes for success in outsourcing, practitioners invariably highlight ‘relationships‘. Yet there are few precise findings on how successful relationships should be developed. Such relationships don‘t just happen: overall strategic business intention must determine the nature of the relationship and the contract.

After the ink is dry: L Campbell/C Hyatt/D Karabinos, EquaTerra

Seeing the ink dry on any just-completed outsourcing deal is a cause for celebration. But then the hard work starts. You are about to launch and administer a new service provider relationship on a scale more complex and riskier than anything most companies have ever done before. A Conference Board study found that 97% of respondents who had experienced outsourcing would outsource their operations again – but would pay less attention to service levels and focus more on the contract and contract governance. This shows that businesses must be aware of the need to develop professional and highly detailed management capabilities that will help them achieve successful, effective long-term sourcing relationships.

Devil's in the detail: Robin Johnson, A & IT Consultants

Key strategic decisions are never easy to make, and implementing them can prove to be even more demanding. If your organisation is thinking about outsourcing its IT function or has just begun an outsourcing exercise, then the following are some points worth considering: 1. Do you have a viable business case for this ‘investment’? Unless you intend to select a partner with revenue sharing as the objective, then most outsourcing strategies are for cost-saving purposes. In the early stages of this process, you will not know the true costs of the exercise. As you work through the process and the details emerge, you should ensure that business case reviews are performed to confirm the ongoing viability of the strategy.

Opening up outsourcing: LogicaCMG

Your company is considering outsourcing for the first time, and you’ve heard that it’s the non-core processes that are the top candidates. But you suspect that this would give rise only to low-level benefits, and ‘non-core’ processes sound like ‘unimportant’ ones. Do you really have any of those? What processes really can be outsourced? This article helps you to identify what can be outsourced, what it means for your business, and what kind of benefits can be expected. Start-up outsourcing agreements can benefit from knowledge drawn from the most advanced outsourcing deals.

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