Future Focus - Tomorrow's Insights for Today's Decision Makers 


To Outsource Or Not, Is That The Question? - Part 2


April 2004

Aaron Kumove -- Managing Director, Horizon Consulting


Last issue I raised the paradox of of IT outsourcing. 
If it is such a good idea then why are so many organisations disappointed with the results?

To a large extent I think it is because many organisations are unclear on why they are outsourcing and the particular things that should or should not be outsourced.  A commonly heard mantra is that we should outsource things which are not core and keep in-house those things which are.  i.e. an opportunity cost approach.
This begs a very important question - how do we define what is core?

For many organisations the answer is built on faith or ingrained belief rather than on analytical assessment (be it quantitative or qualitative).  If we agree that keeping in-house those things which are core and that outsourcing those things which are not has some value, then doesn't it follow that we need a good way to define what is core?

For many IT organisations embarking on an outsourcing journey this first step is often where the trouble begins.  With sometimes little more than a finger in the air or a "gut feel", major outsourcing decisions are made and sometimes the baby ends up being thrown out with the bath water!

How can we make these decisions in a more effective manner?

To help our clients who are considering going down this path we employ a number of models.  Our IT Value Chain Model allows us first of all to catalogue and categorise the functions that an IT shop undertakes.  This model is designed to expose each of the major customer facing (primary) and non-customer facing (supporting or enabling) functions of an IT shop. 
We then run these functions through a set of filters (some of which are based on the work of Peter Keen) to:
  • Assess them in terms of their impact on a business or its customers
  • Assess them in terms of the value that they generate or destroy
When we run each IT function through these filters we end up with a matrix that illustrates customer/business impact against value created or destroyed in delivering a function.  The general idea is as follows:
  • Keep in-house those functions which define you in your customers' eyes or are critical to everyday performance and which generate value. 
  • Look to outsource those functions which are performed in the background and which destroy value.
  • The results from these first two exercises are then sanity tested against a variety of environmental factors (some internal and some external) to ascertain the feasibility of the preliminary sourcing decisions. 
  • Final sourcing decisions are then made.
Does this kind of approach yield better answers than a "gut feel" approach?
In many cases surprisingly so. 

The value if this approach is that not only does it force IT to confront itself in the mirror and ask itself some difficult questions, but also to go through a disciplined process to come up with the answers. 

Are we adding value by undertaking this function?  In undertaking this function are we making a positive difference to the business or its customers?  Would we be better off letting a third party undertake this function so that we can concentrate on the ones that are truly important and which no third party is likely to deliver as well as we can?  Are we expending our opportunity cost most effectively and efficiently?
In short, do we really understand what is core and what is not?

These are the kinds of questions that IT outsourcing is supposed to provide an answer to but the results are often disappointing.  One of the key reasons for this is the lack of a disciplined assessment process, leading to core functions being outsourced and non-core functions being kept in-house.

Rather than using outsourcing as a means to hopefully deliver the right answers to these questions it makes a lot more sense to have a quality process determine the answers to which outsourcing can then be applied as appropriate!

Do we really want to be placing big IT sourcing bets on a roll of the dice?  Unfortunately in many instances that analogy is not unfair. 

Next month we will continue this discussion on a more effective approach to outsourcing but right now I need to go buy some lottery tickets before the next draw . . .

Aaron Kumove -- Managing Director, Horizon Consulting
Want to comment on this issue?  Perhaps you would like to add to the views expressed here, or even disagree violently!
Either way we welcome your thoughts and would be happy to include your views in upcoming issues.

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