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The Emerging Enterprise - Is It Time for the Hired Guns? Part 1
Is It Time for the Hired Guns? Part 1
Outsourcing can free up valuable resources and save you money. What are the benefits to you?
By Barbara DePompa Reimers
Nowadays, businesses of all sizes are working with limited budgets to implement and
manage new technologies. As a result, many are turning to outsourcers to host certain applications or services to boost their competitive edge.
IT research firm The Gartner Group says spending on outsourcing will grow from $101 billion in 2001 to $160 billion by 2005.
Thereıs good reason for its growing popularity. Outsourcing eliminates the capital cost of software and hardware as well as the staffing requirements associated with implementing and maintaining any new system.
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Allowing an outside organization to host specific applications also enables businesses to rapidly reap the benefits of new technology without disrupting existing IT operations.
In fact, according to a recent survey of 177 customers who have outsourced some of their operations in the past 12 months, the biggest reason cited for turning to outsourcing is the potential to reap savings in operational costs. The second most important reason mentioned by respondents was a desire to reduce the time needed to implement new projects. According to the survey, conducted by InformationWeek Research, other common reasons businesses are turning to outsourcing included:
- Sticking to core competencies
- Improving service for internal users
- Improving access to technology
- Upgrading customer service
- Reducing the need to hire additional staff
For small to mid-sized businesses, the advantages of outsourcing include:
- The ability to compete with larger companies by transforming critical, yet "non-core" processes that boost overall quality and cost effectiveness.
- Increasing revenue without hiring more personnel by getting rid of time-consuming back-office functions.
- Adding Web-enabled functions and processes that increase customer satisfaction, along with revenue, without burdening IT with implementation and ongoing support.
Forms of "time-sharing" have been around since the 1960s. The term "outsourcing" was coined in the mid-1980s, when providers took advantage of economies of scale and specialized skills to offer IT services at prices below what users would spend to furnish those services themselves.
Increasingly, outsourcing deals that were once primarily fixed-price contracts are growing into utility-based pricing schemes, as IT hardware, servers, storage devices and software become commoditized. According to InformationWeek, while outsourcing has always been a trade-off, offering financial predictability but not operational flexibility, usage- or utility-based pricing flips that around -- at least in theory -- prompting a more rapid response from contractors, as a companyıs IT needs evolve.
Due Diligence
Ultimately, the success of any outsourcing relationship can be determined by several key factors. OutsourcingCenter, a publishing and research division of the Everest Group Inc., published white paper called "Characteristics of Outstanding Outsourcing Relationships," which highlights several things businesses can do insure a successful outsourcing relationship. Here is a list of tips for improving any outsourcing effort, from industry observers and OutsourcingCenter research:
- Plan, plan, plan. Itıs critical to set up initial planning sessions with any service provider to formulate joint goals and key success factors to be achieved by any outsourcing relationship. Initial planning cannot be stressed enough. Every step in the outsourcing process should be measured against those shared goals to ensure a successful engagement.
- Structure the relationship in advance. One way to improve the odds of a successful outsourcing relationship is to structure the relationship before any contracts are signed. This is counter to most outsourcing agreements today, in which contracts or letters of intent are signed and relationship details are worked out later. The service provider must have the experience needed to do the job. By structuring the details up front, you can better ascertain if the service provider can deliver exactly what you need.
- Focus on business objectives rather than costs. The most successful outsourcing relationships are built not on reducing costs or increasing process efficiencies, but on accomplishing a new business objective that canıt be achieved without leveraging the strong points of a specific service providerıs organization.
- Use penalties and incentives to motivate performance. Businesses that use innovative "risk-reward" schemes are best able to ensure specific goals are achieved. Incentive-based pricing or risk-reward structures are highly effective motivators for service providers to achieve challenging goals that will greatly bolster your businessıs competitive edge.
- Foster a trusting relationship. The relationship with your service provider is crucial. Businesses must understand that the outsourced operation's success or failure inextricably ties together both the customer and the service provider. Focusing on corporate cultures and searching for a partner thatıs a good cultural fit helps build a strong partnership.
Coming next month: In Part 2 we will explore how to gauge your outsourcing needs.
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