Evolving Sourcing Dynamics
The benefits of outsourcing are not limited to just saving the pocket. With changing business dynamics, the competitive benefits of outsourcing have also grown — from cost savings, to value creation for customers. IT sourcing is therefore no longer being viewed as a cost to be minimized; it is an asset to be business aligned.
Today, global organizations are more inclined toward obtaining greater value and benefits out of every sourcing relationship. Although many IT outsourcing service providers continue to approach such relationships through infrastructure maintenance and application development value propositions, customers look at IT outsourcing management as a strategic enabler for focusing on larger issues, such as business strategy and change management.
One of the evolving IT sourcing strategies - Total Outsourcing Strategy(TOS) - is more inclined toward transformation. TOS includes a complete handover of an organization’s IT sourcing function to the outsourced service provider, except for some core functions that are retained in-house.
Under traditional TOS contracts, customers followed a lock, stock and barrel approach, and outsourced complete IT functions including assets, strategy definition, architecture, and operations to the outsourcing service provider. While this approach addressed some of their pain areas giving them the access to the outsourced service providers’ domain expertise, skill sets, industry best practices / processes and their global services delivery capability, issues such as loss of strategic control, lack of transparency, and static contracts with inflexible SLAs left a lot to be desired in the outsourcing engagement.
Evolution of ITO Sourcing Model: Key Trends
The four key outsourcing trends in the evolving IT Outsourcing (ITO) industry are:
1. From Cost Benefits to Transformation-led Value Benefits
The IT outsourcing industry is a matured industry. With evolving customer needs, IT outsourcing strategies are also being transformed. The traditional TOS strategy, described above, is undergoing rapid metamorphosis because the transformation is now also being driven by the changing role of a CIO who is more focused toward utilizing IT as an asset to be aligned with business.
Consequently, while some of the vital performance indicators, such as cost benefits, quality and productivity are still important in assessing the value benefits of ITO, there is stronger emphasis on deriving transformation.
2. Changing Dynamics of Asset Ownership
Ownership of IT assets is one of the most important factors in determining the dynamics of an outsourcing engagement. Historically, service providers leveraged assets ownership transfer in ITO engagements to deliver financial and operational benefits to the customer. However, key changes in the market reversed this dependence, resulting in increased exploration of the “asset-light” outsourcing model. Several factors drove the increase in adoption of the asset-light model. The model provides better alignment of service providers’ incentives with customers’ interests. Customers find it beneficial to own IT assets due to the inherent flexibility, control and benefits of scale. Service providers avoid the capital expenditure requirements that reduce the Return on Investment (ROI) of asset-heavy deals.
New technologies also serve as a catalyst for the asset-light approach due to the constant turnover of the asset base and the difficulty of predicting the technology road map. Finally, the emergence of Infrastructure Management Outsourcing (IMO) through a global delivery model played a key role in instituting asset-light as a sustainable model.
The whole idea of transfer of assets should be restricted to reduce the capital expenditure of the organization going in for major transformational change and one-time cost savings. Today, models such financial leasing, vendor managed inventory, and such, provide customers with the benefits of converting capital expenditure to operating expenses while providing them with the strategic control of their IT assets.
Leading analysts / sourcing consultants such as Everest, TPI and Gartner have validated the facts that the transfer and ownership of IT assets is more of a financial strategy than an IT strategy. The more critical aspect is to ensure effective “Asset Lifecycle Management.” The cornerstone of asset strategy should be the “Asset Right Cycle” concept whereby the sourcing provider consults with customers on how to ensure that the assets are managed effectively in their lifecycle and utilized to their capacity.
It should help the organization to optimize investments made on assets through:
- Adoption of the right technology platforms
- Phasing out of legacy platforms
- Technology refresh of end-of-life equipment / depreciated assets
Hence, organizations should treat asset ownership as more of a business strategy than a financial one.
3. Pay Per Use Lease Model
The Pay Per Use Lease Model is a computing model that delivers IT infrastructure as a measurable service, aligned with business needs and capable of adapting to changing demands. There is need for dynamic infrastructure and operations that can ramp up and down with changes in the business and, hence, the IT requirements of an organization.
Organizations worldwide have been investing in infrastructure that can handle the growth envisaged for the next three to five years. This has resulted into huge under-utilization across the technology stack. The higher the investment in infrastructure, the higher the investment in operations that support it. This results in excessive IT budgets and cost overruns.
The Pay Per Use Lease Model enables the postponement and efficient investment in IT infrastructure. It provides the customer with the following benefits:
- Right investment at the right time, in the IT infrastructure
- Reduced risk in finalizing, and thus, over-sizing the assets at a stage where the architecture is still evolving
- Flex-up and flex-down options for assets at any point in time during the contract period. This will ensure the optimized utilization of assets throughout the lifecycle of the contract.
- Latest technology is provided during the contract period.
4. From TOS to Full-services Collaborative Sourcing
In the TOS model of outsourcing, a customer transfers the entire IT control to the service provider, which sometimes results in a loss of strategic control, inflexible SLAs, and a lack of transparency. Whereas, in the in-sourcing model , the agility to respond to the latest technologies and skill sets becomes a challenge. This dissatisfaction with conventional sourcing models and the void between in-sourcing and TOS models has paved the way for a paradigm shift and created a demand for collaborative and value-centric sourcing models, wherein a customer retains control over the IT strategy and enjoys a lot of flexibility and transparency.
These collaborative sourcing models have evolved from input-based (full-time employee + scope + service-level agreement) to output-based (IT or business output) sourcing models.
The Ideal IT Outsourcing Model
An ideal IT outsourcing model would focus on the following key components of the IT sourcing strategy:
- A complete IT sourcing management branch that places greater emphasis on transformation and allows customers to focus on core functions. This can be realized if the IT sourcing strategy is business-focused rather than technology- or operations-focused. It helps in the creation of a thought leadership model that allows the outsourced service provider to focus on operations innovation and the customer to focus on business innovation
- The sourcing strategy should emphasize on leveraging strong operations and engineering skills of the outsourcing vendor. The “asset-light outsourcing” concept addresses customer challenges on the asset front through asset optimization, asset right cycle and better operations rather than just transferring assets to the outsourced service provider in question.
- An outsourcing contract that provides enough flexibility in terms of ownership and control. TOS with a collaborative engagement model helps organizations retain control over the relationship, fueling greater confidence and higher risk-taking ability.
- Plan an IT sourcing strategy that will accelerate the cost impact. A year-on-year reduction in overall IT expenditure, rather than a significant cost advantage only in the first year.