Expect more selective IT outsourcing, part 1

A recent survey by Colemen Parks shows that 90% of senior decision makers believe that the business cycles remain very volatile in the coming years and 80% believe that their organizations should become more flexible in their approach of business and technology.

Business agility and common sourcing practices in IT are two words which are drifting apart. And the gap between both worlds increases only with the current pressures on cost (see also this post). The CIO is now still able to sell its traditional sourcing decisions to the business as having no other choice due to the economic situation. But signing a five year outsourcing contract for the whole infrastructure or application portfolio puts both IT and business in a straight jacket with limited ability to maneuver.

The economy will be picking up soon and that means that business are looking forward again and beyond short term cost cutting. The organization as a whole will have to shape up and make sure it has adequate long term strategic advantages available to deal with:

• Competition (ever fiercer competitors and demanding customers; decreasing pricing power; and profit margin and continuing pressure to increase productivity)
• Rapid pace of innovation and changes (more product variety and shorter product life; faster response to changing market; expensive R&D; and increasing risk for obsolescence)
• Globalization (lower trade barriers; faster deployment of resources and technology for worldwide facilities; easier access to low-cost economies; and more options for sourcing at lower risks)
• Increasing complexity of product and process technology (expensive investment for new product development and/or production facilities; and wide array of knowledge or expertise for management)

And IT has to be able to stand side by side with the business to capture opportunities and deal with threats. Depending on whether the CIO acts like a Chief Infrastructure Officer or Chief Integration Officer will IT and sourcing be able to add to the success of the business or limit it. To me a Chief Infrastructure Officer is somebody who focuses on:

• short term objectives, (obeying to any demand to cut costs)
• technology and
• the IT department.

A Chief Integration Officer on the other hand focuses on:

• balancing short and long term objectives, (includes pushing back if objectives damage long term growth)
• adding measurable business value (more on that here and here)
• the organization as a whole

The difference in CIO is also reflected in the sourcing strategy. The old-school CIO is more likely to opt for outsourcing technical silo’s as it allows for maximum short term gain (maximum volume, technology driven), the newby-CIO will look define its sourcing strategy based on the characteristics and needs of both business and IT (selective, business sensitive).

I am convinced that in the medium term organization choosing selecting sourcing arrangements will be the winners, because:

• Achieving 15% less cost (traditional sourcing) versus 10% (selective sourcing) is not going to make such a huge difference. Example: if the IT budget is 5% of the companies’ overall budget than 15% less counts for a 0.75% reduction of overall budget. So sourcing is not going to save the company if it is standing at the abyss.
• The standardization enforced by traditional sourcing (otherwise the vendor cannot achieve the economies of scale required to reduce costs) introduces a lack of flexibility (except maybe for volume flexibility), agility and choice, which forces the business to set up their own IT departments or buy IT services as soon as the economy picks up again. This will introduce hidden IT costs which will have an impact on the bottom line performance.
• Selective sourcing arrangements have a lower risk profile and thus a lower value at risk (VaR) than traditional sourcing contracts which typically make it into the newspapers if they fail because of the $$$ at stake. If the scope of the selective sourcing contract is derived from the characteristics and needs of one or more specific business unit/process is it also easier to get active buy-in from the business owners. This in contrast to generic infrastructure or application contracts for which it is much harder to find an active sponsor in the business domain.

In a future posting on this subject I will elaborate a bit more on why I believe selective sourcing has the future and how one can scope these sourcing arrangements.