Posts filed under 'Why Outsource?'

IT Increases Application Outsourcing Despite Disappointing Strategic Value

Half of all companies plan to increase their application development and maintenance (ADM) outsourcing this year, according to new research from tax and business consultancy KPMG and outsourcing analyst firm HfS Research.

That’s not surprising, says Phil Fersht, CEO of HfS Research. “The more experience the buyer gets with outsourcing application development work — coupled with the increased knowledge their provider develops of its institutional processes — the greater the cost savings that can be achieved by moving more work out to the providers’ lower cost staff.” Increased adoption of Software-as-a-Service offerings and the desire to transfer legacy applications to third parties also continues to fuel growth in ADM outsourcing, says David Brown, principal in KPMG’s Shared Services and Outsourcing Advisory.

But while the majority of the 399 outsourcing customers surveyed — 88 percent — are satisfied with the cost reduction and standard delivery performance of their providers, they indicated that outsourcers are falling short in other areas. Just nine percent reported that their outsourcing providers were very effective at achieving innovation, 11 percent said providers were very effective in accessing analytical capabilities, and 18 percent said they were very effective in gaining access to new technology.

If outsourcing customers are looking for someone to blame, however, they might start by looking in the mirror.

“Clients wanted cheap and cheerful, they got cheap and cheerful,” says Fersht. “And there are many providers today specializing in the cheap and cheerful, who are really damned good at it. Some of them even openly discuss with analysts and advisors that their main strategy is to target HP and IBM renewals and undercut them by 30 percent.”

While outsourcing buyers say they want more than low costs and standard delivery from their outsourcing relationships, their contracts tell a different story. “Gaining more strategic benefits from outsourcing, such as gaining access to premier talent, has a price and often organizations with a strong focus on maximizing cost savings contract with providers in a way which limits their ability to deliver premier services or premier resources,” Brown says. “It is a case of ‘you get what you pay for’, and over the past several years many clients wanted to pay for as little as possible.”

That’s unlikely to change in the near term, says Fersht. “When you consider that most major enterprises began outsourcing administrative IT in the 90s — and some even earlier — you have to draw the line that if these are the results of two decades of engagements, it probably isn’t going to get much better.”

Nonetheless, the buyers surveyed said that their core areas of strategic focus when outsourcing include accessing better talent (70 percent), gaining access to better technology (62 percent) and improving analytical capabilities (62 percent). If they’re serious about those goals, says Fersht and Brown, outsourcing customers will need to change their approach in several ways:

Say What You Mean

“Today, the vast majority of companies are failing miserably at communicating their strategic needs and encouraging their partners, or potential partners, to meet them,” says Fersht. Outsourcing customers musn’t leave it to their providers to define their needs for them. “Unless clients understand and define innovation,” says Brown, “a provider cannot help enable it.”

Loosen the Reigns

“Buyers need to consider giving providers more latitude in how they deliver new services,” says Brown. “Overly prescriptive contracts and approaches can limit provider flexibility to introduce new and more innovative service delivery models.”

Put Your Money Where Your Mouth Is

“When it comes to funding, few enterprises are willing to invest in either their internal or external resources to improve their provider relationships,” says Fersht. “Instead, their managers persist in grinding their providers’ prices lower and lower.” Companies that are serious about joint innovation with providers will fund the relationships accordingly and share the benefits.

Seek Partners, Not Providers

“Providers have become integral to the success of the smart enterprise … but their clients have to treat them fairly and engage them as an extension of their own enterprise, as opposed to the ‘master/slave’ model,” says Fersht. “Pulling together a disparate set of executives across various internal and external entities and encouraging them to team together to improve the competitive nature of their enterprises is a critical capability.”

Get Real About Capabilities

“Buyers need to be aware that providers are limited in what they can deliver in these high demand strategic areas. And the providers need to set the right expectation with the buyer to ensure there is a clear understanding of what can be delivered,” says Brown. “It is a balancing act by the providers to be honest and transparent enough with their buyer, but also not hype their capabilities beyond their means during the sales cycle.”

Contract for Co-Innovation

Those interested in a more strategic partnership with outsourcers will focus on collaboration, not cost, in negotiations. This “evolving skillset requires a shift of focus toward maximizing the size of the entire pie to the benefit of all participants,” says Fersht.

“Smart operations leaders need to learn the capabilities of their providers better in order to create contracts that inspire co-investment and co-learning from both parties,” says Fersht. Enabling your provider to develop technology and IP that can leveraged across their client base, for example, is one way to create value for both parties.

Author: Stephanie Overby



August 26th, 2013

Two-thirds of CIOs feel locked in with outsourcers

Almost two-thirds of senior IT executives do not think their suppliers would be open to renegotiating outsourcing contracts, despite the upsurge in activity.

According to a survey of 250 senior IT decision-makers in mature European markets, 65% believe suppliers would not be open to renegotiating and 48% think the suppliers would kick up a fuss if asked to renegotiate.

The survey, carried out by sourcing consultancy Alsbridge, also revealed that businesses are not currently capable of renegotiating effectively, with 71% admitting they lack the necessary information to do so. Just over half (51%) are addressing this by investing more time in renegotiations.

The confluence of these factors has given 39% of the executives the feeling of being locked in to contracts.

Alsbridge managing partner Rick Simmonds said there is currently a lot of renegotiation activity because many multi-year contracts are coming to an end.

He said many of these contracts were signed with the specific aim of reducing costs when the downturn was at its deepest point. “A lot of deals were done in response to the downturn a few years ago, and they were to cut costs. [Decision-makers] have to ask whether they are still fit for purpose,” said Simmonds.

He said both parties need to be open to change.

“IT suppliers are right to kick up a fuss if clients are moving the goalposts and failing to honour previous commitments or recognise unrecovered investment,” Simmonds said.

“However, if the business need or the technology world has changed, then it is incumbent on suppliers to be receptive and not keep their clients in the stranglehold of an outdated contract. This applies even more when the contract is nearing its end of term, when everything should be open for reshaping,” he added.

But businesses need to invest time and resources in the renegotiating process if they are to benefit, as they are not currently prepared. A total of 57% of the executives quizzed said they do not have an overarching sourcing strategy in place, and 42% have no formalised review point in their ITO contracts.

Many have learnt from past mistakes, with 54% building bigger renegotiation teams and 51% investing more time in proceedings. Almost half plan to start the renegotiation process earlier.

“At the heart of every successful contract is a clear renegotiation strategy,” said Simmonds. “IT leaders can bolster their position by matching up to suppliers’ highly skilled and well experienced teams, and by starting the process at the right time – usually around two years before the contract ends.”

He said multi-sourcing is a way of making renegotiations easier because relationships with multiple suppliers means there are alternatives if required. But businesses doing this need effective service management in place.

According to research from ISG, renegotiated IT outsourcing contracts accounted for $970m and new IT outsourcing deals $940m in Europe in the first three months of this year.


What the experts say about renegotiating IT outsourcing contracts

  • “Be prepared to concede certain aspects (increasing the term, adding to the scope, simplifying measurement criteria, etc) to secure a more flexible, agile, accountable contract.”
  • “Be very clear on what the reasons for the renegotiation are and what the objectives from it will be; try to do a once and for all re-baselining taking into account all issues, rather than death by a thousand cuts. Think laterally about what changes could be made.”
  • “The most important thing for a company considering renegotiations is to have a clear understanding of their objectives, and what they want to get out of the restructured IT outsourcing contract. A successful renegotiation also relies on creating financial leverage, a willingness to execute viable alternatives and a strong commercial relationship with the supplier. Another significant factor is time. Whether mid-term or end-term, companies must ensure that they allow enough time to analyse and understand all factors that might impact the new contract and to fully engage their internal stakeholders to ensure the best possible outcome.”
  • “It is easy to get caught up in the renegotiation process, but it should be remembered that not everything is negotiable – a company must decide on its priorities and negotiate to build a workable solution and sourcing relationship, not to win a battle.”
  • “Build a deeper, more forward-looking and business-relevant understanding of the points of difference and parity between IT services firms; demand more flexibility and pro-activeness from IT services vendors; direct more attention toward productivity improvements, not just cost reduction; seek and leverage more aggressively operating and business model innovations; collaborate with IT services vendors to co-create new capabilities in areas that matter; and demand constant improvement and global best practices.”


Source:  (by Karl Flinders)


June 6th, 2013

Outsourcing Success Tips

by Janet Attard

Outsourcing offers many benefits to small businesses. Perhaps the most important one is that it lets the small businesses  focus on their core capabilities and get other tasks done on an as-needed basis without adding permanent fixed expenses.  But like so many other “solutions” to small business problems, the results of outsourcing don’t always meet small business owners’ expectations.  Missed deadlines, service providers that stop answering phones, work or finished products that don’t meet expectations are just a few of the problems small business owners can encounter when they outsource work to independent contractors or other small companies.

February 21st, 2012

Relationships in outsourcing

By Bindi Bhullar

Outsourcing has changed from a pure client and supplier relationship to a much deeper partnership. I believe that European companies can save billions by outsourcing

IT, with businesses forced to reduce overhead and boost productivity for minimal cost.

It is one thing for a company to get services provided from a cheaper country, but it is another thing entirely to realise that a company’s ability to execute

internal strategy depends on its outsourcer. This is largely because the business has to rely not just on the supplier’s ability to deliver, but also on its ability

to adapt strategically and make changes according to customer needs.

It is this flexibility that defines the move from a contract to a partnership, creating a whole new world of possibilities. But trust is fundamental here. Strictly

defined contracts can only go part of the way towards ensuring that things run smoothly. (more…)

February 21st, 2012

European businesses to outsource more IT

European businesses to outsource more ITAbout 53% of organisations in Europe will increase their outsourcing budgets in 2010, according to a survey from Gartner.

Of the 206 European organisations surveyed, 40% said they are planning to raise their external IT services spend. While 14% of those with IT budgets of less than €1m expressed an interest in outsourcing, compared with only 6% in 2009, it found.

SaaS and infrastructure utility implementations were up 6% and 5%, respectively.

However, Claudio Da Rold, vice-president at Gartner, said organisations will expect providers to deliver further cost reductions.

September 8th, 2010

Next Posts Previous Posts


Most Recent Posts

Posts by Month