Benefits of outsourcing are not limited to saving pockets. With the changing business dynamics, the competitive benefits of outsourcing have also grown — from cost savings to value creation for customers. IT 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 proposition, customers look at IT outsourcing as strategic enabler for focusing on larger issues, such as business strategy and change management.
One of the evolving IT sourcing strategies, Total Outsourcing (TOS) strategy is also more inclined toward transformation. TOS includes a complete handover of an organization’s IT function to the service provider, except for some core functions that are retained in-house.
Traditional TOS
Traditionally, under the TOS contracts, the customers followed a lock-stock-barrel approach and outsourced complete IT function including assets, strategy definition, architecture and operations to the outsourcing service providers. While this approach addressed some of the customers’ key pain areas giving them the access to the 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, static contracts with inflexible SLAs left a lot to be desired in the outsourcing engagement.
Evolution of ITO Sourcing Model: Key Trends
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 the 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 a 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 an effective “Asset Life Cycle Management.” The cornerstone of asset strategy should be “Asset Right Cycle” concept whereby the sourcing provider consults the customers on how to ensure that the assets are managed effectively in their life cycle and utilized to their capacity.
It should help the organization to optimize the investments made on assets through:
- Adoption of right technology platforms
- Phasing out of legacy platforms
- Technology refresh of end of life equipments / depreciated assets.
Hence, organizations should treat the asset ownership as more of a business strategy than a financial strategy.
3. Pay Per Use Lease Model
“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 a need for a dynamic infrastructure and operations that can ramp up and ramp down with the changes in the business and, hence, the IT requirements of an organization.
Organizations worldwide have been investing in infrastructures that can handle the growth envisaged for next three to five years. This has resulted into a huge under utilization across the technology stack. The higher the investment in infrastructure, the higher is the investment in operations for supporting it. This results in excessive IT budgets and cost overruns.
The Pay Per Use Lease Model enables postponement and efficient investment in the 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 the assets at any point in time during the contract period. This will ensure 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 control of its IT to the service provider, which incurs to loss of strategic control, inflexible SLAs and lack of transparency whereas in the in-sourcing model of outsourcing agility to respond to latest technologies and skill sets becomes a challenge. This dissatisfaction with conventional sourcing models and the void between in-sourcing and TOS models paved the way for a paradigm shift and created a demand for collaborative and value-centric sourcing models, wherein a customer retains the control over 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.
An ideal ITO sourcing model, therefore, should focus on the following as the key components of the sourcing strategy:
- A complete sourcing strategy that places greater emphasis on transformation and allows customers to focus on the core functions. This can be realized if the sourcing strategy is business-focused rather than technology or operations focused. It helps in the creation of a thought-leadership model that allows the 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. Asset-light outsourcing concept addresses the pain point of customers on the assets front through asset optimization, asset right cycle and better operations rather than just transfer of assets to the outsourcing service provider
- Go for an outsourcing contract that provides enough flexibility in terms of ownership and control. TOS with a collaborative engagement model helps organizations to retain control over the relationship, fueling greater confidence and higher risk taking ability
- A 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.