India at heart of 21st century outsourcing

JERRY GREENBERG

THURSDAY, APRIL 21, 2005 12:53:30 AM

We are at the cusp of a fundamental shift in the way organisations think about outsourcing. A few of the world's largest buyers of IT services are re-examining their sourcing strategies, and beginning the move towards a new approach to outsourcing.

There is new evidence that is proving out this shift. Recent announcements by the big consulting behemoths including IBM, Accenture, and EDS include reports of smaller outsourcing contracts, splitting deals with compebreastors, unravelled deals, and new compebreastion.

While Forrester Research estimates that the average Fortune 500 company spends close to $400 million, or 3.8 percent of revenue, annually on Information Technology, and this figure is only expected to grow, the truth is that many companies are not satisfied with the results from their IT investment.

In some of the world's largest companies, CEOs and their senior management teams are thinking about IT in a very different way. One of the most significant changes we observe is that the old models of IT sourcing are being discarded and a fundamentally different strategy is emerging. This new approach seeks substantially better results for their business.

This new sourcing strategy puts compebreastion at its core. Global industry leaders and some of the world's largest buyers of IT, including JP Morgan Chase and Dow Chemical, are moving away from monopoly agreements and introducing the dynamics of compebreastion. Three traditional approaches to IT sourcing are:

1. In an external monoplogy, a company outsources the bulk of its IT to one major external provider. By removing compebreastion, innovation is stifled, control is lost, accountability is limited.

2. An internal monopoly is created when companies rely on internal staff for the vast majority of IT. While there is a theoretical benefit, most internal IT organisations are not well aligned to the business, not subject to compebreastion, and not held to the same standards and expectations as external providers.

3. A mix and match model consists of a combination of internal and external approaches and is used by most companies today. The greatest inefficiencies in this model are found in the way external providers are selected and managed. Most organisations use a `best bid' approach for each engagement. This approach has the benefit of compebreastion but loses knowledge as companies change providers for projects; this model also fails to foster an environment where providers and internal employees work together to achieve the clients' best interests.

Some organisations are refusing to follow the three IT sourcing models described above and are taking an entirely different approach.

Managed Compebreastion

This model is fundamentally different because it relies on compebreastion as the central concept. We expect this model to outperform all models in service, business results, and innovation. The model is characterised by: HSegmented IT portfolio by business line, technology, function, business criticality, or other criteria. HA small number of pre-selected providers matched to the organisation's segments of work. HPre-selected providers are expected to cooperate and compete in the best interest of the client H A common set of business measurements that evaluate each provider on effectiveness (such as ROI and client satisfaction) and efficiency (such as timeliness and cost) are established. Providers are evaluated regularly and evaluations are transparent and visible, creating ongoing pressure for high performance. HThe right balance. Traditional global integrators provide scale. "Mid-size innovators" force agility, creativity, better pricing, and higher standards.

Return on investment

While challenging, moving to a managed compebreastion model is not insurmountable. However, it requires visible and sustained commitment from senior executives and change that is driven from the CEO level. Most organisations are not realising the financial, operational, and business innovation benefits they expected. The traditional IT sourcing models are simply not effective. However, the good news is that a new model is emerging that holds tremendous promise, and it is based on a proven idea - compebreastion. CEOs need to examine this new model to see if it holds value for their organisation. After all, with the average Fortune 500 company spending over $400 million per year, it is the CEO - not only the CIO - who is on notice.