The Future of IT outsourcing?

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The imminent death of outsourcing has been widely reported. Partly due to US economic woes and the close alignment with offshoring, outsourcing is suddenly off the agenda.  These developments leave us with a question; where will the future of IT outsourcing lie? Is there a justification for keeing the IT function in-house?.

Application outsourcing deals, based on labour arbitrage, have become less attractive. The industry seems to be moving towards rightshoring of services fast. For example, a major multinational automotive corporation, General Motors, is abandoning its long established IT outsourcing model.

New hybrid strategies

The complexity of IT delivery continues to rise. This is due to rapid developments in such areas as, mobile computing, cloud and multi-channels. New skills are required and it is more difficult for small- and mid-sized organisations to build the acquired capabilities in-house.

In response to increasing frustration, the industry vendors are now introducing hybrid strategies – a combination of conventional ITO and Cloud.  For instance, suppliers such as CSC, Cognizant and Infosys are reinventing themselves as Cloud service providers. They are looking to assess workload, migrate services to the cloud and manage all the elements.

It is not clear if this is going to deliver the promised benefits around agility or cost, but it is at least a step in the right direction.

Flexible outsourcing models

It appears that there is a gap in the market for a new, more flexible outsourcing model, based on Cloud offerings. We see some early signs of such services, especially amongst emerging US vendors, such as Liaison Technologies, and are very keen to see how the market will develop in the near future.

Overall, the whole area presents an increasingly challenging situation for sourcing and vendor management teams as they track this rapidly evolving area and stitch together the required multi-sourcing strategies.

Breaking up is hard to do

Over the years, the 4C team have been involved in dealing with changing the IT supply chain for various corporate actions – mergers, acquisitions, outsourcing and divestment. We have found that divestments are far more challenging, for both divestee and recipient.

In principle, the key steps are to determine the disposition of the staff, the major applications and the sites. Once this is done, at an early stage of the sale process, then the remainder of the work is just novations, isnt it? Difficult decisions about rationalising platforms to achieve the expected integration cost benefits are being marginalised, if not completely eliminated.

Our experience is that divestments are far more painful for IT sourcing teams than M&A.  Key challenges include auditing the asset base, deciding the disposition, negotiating and renegotiating those enterprise licencing agreements, duplicating the telecoms contracts and splitting up complex virtualised environments such as VMware.

Procurement on both sides can end up picking up the pieces. We recommend an early focus on the commercial split of the IT estate in order to boost the joint-management of technical and contractual split. Put together a combined SWAT team across business, IT and sourcing, with representation from both acquirer and divester.

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