10 Drivers of Outsourcing

Text Experience shows IT outsourcing works best when the correct work is outsourced to the correct people and that the agreement is managed in the correct way. For IT outsourcing to be successful the sourcing recipient’s management must have a clear set of goals in mind and a clear sense of the benefits and risks involved. Accordingly, this series of posts on IT outsourcing continues with a look at the drivers and forms of outsourcing and some key factors to be considered for each. This will be followed by a discussion on why IT outsourcing fails.

Although this blog is devoted to CIO’s and therefore IT, this series on IT outsourcing is universally applicable to all sourcing in higher education and other sectors and is not limited to IT outsourcing. As you continue reading though, I encourage you to force Cloud Computing into your consciousness as it is an integral part of version 3 sourcing.

10 Drivers of IT Outsourcing

Studies conducted since 1991 by the Outsourcing Institute point to the following 10 reasons, or drivers, for outsourcing:

Driver Explanation
Improve company focus Outsourcing sets up a framework for an outside expert to assume responsibility for operational details, allowing management to focus on the more important business issues associated with meeting customer needs.
Obtain access to world-class capabilities Because of the nature of their specialization and their own core activities, outsourcing providers bring extensive world-class capabilities, including leading-edge technology, to help companies satisfy the needs of their customers and become more productive.
Obtain resources not available internally Outsourcing is often a viable option for companies experiencing rapid growth, expansion into a new geography, or spin-offs from the parent company – where normally required resources are not readily available.
Function difficult to manage or out of control Control problems are cited as a reason for outsourcing. However, there may be underlying causes – such as unclear management expectations or difficulty in measuring performance – for which outsourcing alone is not the solution. Management in this case should work with outsourcing providers to define requirements.
Accelerate re-engineering benefits An organization can realize the anticipated benefits of re-engineering quickly if it contracts with an outside organization – which is already re-engineered to world-class standards – to take over the process.
Reduce and control operating costs Access to the outside provider’s lower cost structure, which may be the result of greater economies of scale, is one of the most compelling tactical reasons for outsourcing.
Share risks Outsourcing enables management to turn over to its suppliers certain classes of risks – such as demand variability and capital investments. Unlike the buyer, the outsourcing provider can spread these risks over multiple clients.
Free resources for other purposes Outsourcing permits and organization to redirect its resources from non-core activities to ones that have the greatest impact on the business.
Make capital available Contracting out certain functions as operational expenses can reduce the competition for capital since the outsourcing company provides the capital investment as part of its overhead.
Obtain a cash infusion Outsourcing sometimes involves the sale of assets to the provider, which the customer realizes typically as some combination of cash and loan.

In higher education and public institutions in particular the accounting benefits that might be available for corporations might not exist under government accounting standards or may not be a strong enough of a driver on their own. So most IT outsourcing originates from a need to gain access to capabilities, reduce costs or to improve out of control operations.

Often it is a combination of drivers such as a need to improve IT service delivery while reducing the cost of IT. This situation is fairly common where the only recourse for rectifying an out of control IT function appears to be to look to IT outsourcing to solve the problem. This scenario can include the goal of accelerating the needed changes through IT outsourcing even if it means paying a premium over existing costs.

Understanding the politics of an IT outsourcing decision, this also means the situation must be seen as intolerable and requiring immediate turnaround in order for a college president to expend the political capital of an IT outsourcing decision. So success is critical and requires careful consideration. So I have included three of the more salient factors requiring consideration.

Regression Fallacy

Also know as the regression to the mean or the law of averages refers to the tendency for people to ascribe a cause where none exists. In the case of outsourcing, particularly where IT is out of control operationally or financially, the IT outsourcing provider can usually through normal practices and the increased attention being given to IT easily resolve the issues in a fairly short period of time without the use of anything particularly proprietary.

As incredible as it many seem to some what would be considered the vendor’s “secret sauce” is usually not. In fact the circumstances would almost certainly improve just because of regressing to the mean. This is almost guaranteed if any of the IT leadership is replaced with seasoned IT management.

Changing Needs

Since nothing is ever static, IT outsourcing arrangements of any length need to have performance requirements that account for the fact that the initial drivers will likely be addressed early in the relationship and your needs will evolve. Institutions turning to IT outsourcing should also contemplate how their sourcing provider will adapt and adjust as they begin to address the initial drivers. Contracts need to incorporate requirements for continuous improvement over the life of the contract.

To illustrate, let’s say you agree to outsource an underperforming function and pay a premium. As the performance improves the premium will sting every month you pay the bill unless the sourcing provider and you adjust the driver and requirements away from improving performance to now improving cost or other elements.

HR departments in multinational companies are also relying on outsourcing IT software as a way to revolutionise their payroll. It’s thought that using a service like the CloudPay global payroll assessment can help identify common challenges, costs, and obstacles involved in managing payroll provisions across a multinational enterprise. Ultimately, in streamlining the payroll process, global organisations are able to ensure compliance and optimise efficiency. This is why many startups and smaller businesses rely on these cloud based services, making quickbooks vs freshbooks to decide which cloud solution is better fitted to their business needs. This can also be helpful for a startup company who rely on outsourcing for certain parts of their business, such as their accounting – read more about accounting for startups here..

2nd Rule of Business

Google “First Rule of Business” and you get all kinds of results from “Have a plan” to “The customer is always right”. Somewhere along the way I learned “You never hand over your customer to someone else” as the 2nd rule of business. Here that means you never outsource any function to a third party that involves your customers. For higher education that means every student-facing service should be done in-house.

In large part the second rule is to avoid others from stealing your customers, but it is mostly about maintaining control on the customer experience and not leaving it to an outsider that doesn’t understand your customer service culture and the culture of your institution. This can be very challenging when we often focus more on faculty needs along these lines and might outsource the student help desk but not faculty. The idea is the same – don’t turn over the people you value most to an outsider who won’t care about them as much as you do.

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5 Responses to 10 Drivers of Outsourcing

  1. Pingback: 10 Drivers of Outsourcing | The Higher ED CIO « Outsourcing Yes

  2. Jay Miller says:

    Excellent blog and great information. Having worked for a Highly Managed Hosting company in the past, the primary reasons companies contracted with us was cost, scale, expertise, and reliability. Expertise depth covered security, network, applications and data base, storage and backup, as well as an extensive knowlege base that was the ‘secret sauce.’ Clients could scale as their business needs evolved….and on the Cloud side the scale could go up or down to match the season or marketing initiative….harder to scale down on hard assets. An individual project effort or billing rate may appear at first costly, but when you wrap up the network, security support and monitoring, data center redundacies and response to needs….it ends up being a cost-effective approach.

  3. Pingback: 6 Models for Outsourcing | The Higher ED CIO

  4. Pingback: Why Outsourcing Fails (Part 1): Capability and Maturity | The Higher ED CIO

  5. Pingback: Why Outsourcing Fails (Part 2): Pricing, Staff Augmentation, ECFs and More | The Higher ED CIO

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