6 Models for Outsourcing

20 women fashion modelsChoosing the right IT outsourcing model for your situation is not always easy. A great deal of what we understand about IT outsourcing models comes from the work of Feeny-Lacity-Willcocks. Their pioneering work goes back many years and  serves as the reference for so much of the current understanding and thinking on IT outsourcing. We will come back to them in future posts as we cover why outsourcing fails.

This understanding centers on what makes any one of the IT outsourcing models more successful than the other. Although the drivers of IT outsourcing get a lot of attention, which model of IT outsourcing is actually more critical to success than the driver.

Feeny’s (et al) original work included descriptions of four forms of IT outsourcing. These forms can be thought of as general models for the service and were identified as:

  • Application Service Provider (ASP)
  • Business Process Outsourcing (BPO)
  • Application Service Management
  • Offshore Outsourcing

Building on Lacity, ITSqc, LLC, formerly the Information Technology Qualification Services Center at Carnegie Mellon University, describes six models for IT outsourcing service models.  Here the models focus more on what the provider side of the relationship looks like and how risks and rewards are shared between the provider and the recipient. The assumption of any model is that the external provider has the capability to deliver better IT performance at a cheaper cost and better quality.

IT Outsourcing Models

Sourcing Relationships

Description

Traditional Single service provider delivers service to a single client
Co-sourcing Two service providers work together to deliver service to a single client
Multi-sourcing Multiple service providers provide services to a single client.  The client takes responsibility for managing and integrating the services of the various service providers.
Alliance Multiple service providers collaborate to serve one or more clients.  Often, one service provider has a primary role in interfacing with the client on behalf of the alliance.
Joint Venture Multiple service providers form a collaborative business venture to serve one or more clients.  Often, the first client may be a part of the joint venture.
In-sourcing A group within the client organization is selected as a service provider, but it largely managed as an external entity.  Often this group must compete with external suppliers or service providers for work.

IT Outsourcing Considerations

In-sourcing, where it is used, is not often thought of as sourcing since the jobs are still in-house to the institution or state system. That doesn’t mean in-sourcing isn’t without controversy. Institutions or systems having some form of a decentralized IT organization or a federated model regularly experience tension and the politics of where a function or service will be delivered from as well as around issues of governance and autonomy.

Institutions that are large enough may even have enough in-sourcing to warrant IT financial management models beyond just show-back on costs. In these institutions you often find more formalized chargeback or cost allocations for services and systems. As an aside, the report Approaches to Funding IT Common Good Project by the University of California, Berkeley offers a wonderful illustration of this point. As common as in-sourcing is I continue to be surprised by just how little coverage it gets in our trade publications and in the research.

So what model is more common? The traditional model is very common at the transactional level. Even when the percentage of IT outsourcing is high, we often see a sole-source provider rather than multiples under other models for any given function being outsourced. Having said that, and considering the view of cloud computing and version 3 sourcing, most IT organizations have more than one function sourced to a third party including those outsourced to a web services solution or cloud service provider.

To summarize the net results of this approach, most colleges have lots of single purpose IT outsourcing arrangements that are sole-sourced requiring the college’s IT department or others to manage the service. This includes the traditional OEM-VAR model. Accordingly, this then requires a recognition the multi-sourcing model is being used since that is how the IT department appears when viewed holistically. One IT department maintaining and managing multiple outsourced services.

Vendor Management

By now it should have sunk in that with all of the IT outsourcing for various services, CIO’s are in the procurement business. As with all procurement and IT outsourcing decisions vendor risk is a top priority. Unfortunately, our profession is really only comfortable discussing vendor risk as it relates to cloud computing these days. More attention is needed on the other procurement and outsourcing decisions we make every day.

Managing the vendor risk is a bigger topic than will fit here. Simply put, there is an incredible range of vendor related risk with an almost equally complex set of mitigation strategies. No matter what, the more IT outsourcing relationships you have and the greater the dependency there is on those relationships, the more critical your vendor management practices are.

Economies of Aggregation

One of the secondary benefits of several outsourcing drivers is being able to gain economies of scale through the IT outsourcing provider. Generally this is achieved by leveraging the aggregated purchase power of the outsourcing provider or by directly aggregating more of your outsourcing under fewer providers.

With so many IT outsourcing providers in the mix at most schools, benefits from vendor economies can be quite elusive. Additionally, it can be very difficult to find a provider willing or able offer additional discount points below the typical educational pricing even if they are handling a large client base. Similarly, if you decide to aggregate your spending by consolidating IT outsourcing under fewer vendors, you may again find few vendors willing to pass along additional discounts on top of the educational pricing as your spending increases.

Choke or Be Choked

“One throat to choke” is an overused phrase in proportion to the frequency it actually occurs. To benefit from this idea you have to be willing to do some choking regardless of the use of multi-sourcing or any other IT outsourcing model. If you are not prepared to choke your vendor, be prepared to be choked by your users and maybe your boss.

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