Chronic underinvestment in IT is now more prevalent given the economic climate of the past few years. Excellent post on the critical concept of technical debt.
Skills, best practice and business alignment mean outsourcing is here to stay
(First published in ComputerworldUK)
Is the IT offshoring trend we have seen over the last few decades now beginning to reverse whereby outsourcers and their customers are beginning now to opt for an ‘onshoring’ alternative?
It is true that traditional lower cost IT centres like India are no longer quite so appealing as local wages rise, but there will always be other, newer emerging economies that offer attractive labour arbitrage opportunities. However cost is only one consideration: these inexperienced new service delivery centres may struggle to provide a suitably skilled workforce, operational maturity and the levels of governance and risk management that Western markets require – which means that whatever is saved in labour cost can easily be lost in risk exposure.
The end of labour arbitrage?
Over the years industry surveys have consistently confirmed low labour cost as the prime driver for outsourcers moving services delivery to offshore centres. But with the cost differentials between the buy and supply side economies now reduced, outsourcers are now being forced to focus on building up their service portfolio so they can provide specialist expertise in everything from implementing IT governance procedures to implementing emerging technologies.
From the CIO’s point of view, the debate goes on about whether to offshore or onshore, and whether to outsource or run the IT operation or develop applications inhouse. It is worth noting here that despite the confusion, outsourcing and offshoring are not synonymous. A global outsourcer may have multinational operations and favour lower-cost centres where appropriate, but ultimately cost is only one aspect of their overall service offering. So if offshore cost advantage is becoming less attractive as a reason to outsource, what are the other issues driving the debate?
The offshoring/outsourcing debate
Politics is one. The rhetoric surrounding offshoring, particularly during election season, has notched up since the economic crisis. The story of jobs (in IT, manufacturing or anything else) lost to overseas workers has been a sore point for some time. Indeed, perhaps as a condition of its government bail-out, General Motors undertook a highly publicised “reversal of outsourcing” strategy in the US in 2009. And because of this offshoring and outsourcing conflation, the negative result of such high profile cases is that in many minds outsourcing can automatically equate to a loss of local jobs.
There are other issues as well. Since the onset of the economic crisis CIOs have become increasingly impatient with what they perceive as a lack of transparency from providers in areas like cost, mission creep and service deliverables. So does this mean that the outsourcing market is shrinking? Well, actually, no. Of the estimated $US3.6 trillion global IT spent, only 22% goes to external services providers who assume full or partial responsibility for an IT operation – a percentage that has remained roughly the same for many years.
The majority of IT funds is spent on hardware, software and IT personnel including contract staff. So, while the outsourcing budget may not be expanding, there is little evidence that it is going away. Here, then, is the question: If the offshore labour cost differential is losing its edge, why is outsourcing continuing to thrive?
Buying in talent
Clients tell us that their reason for outsourcing today owes much to the continued economic weakness which has forced them to stall projects and run extremely lean teams. But they can no longer continue to cut back and just watch and wait – the backlog of transformation programmes have grown which must now be implemented. They also see that they are suffering opportunity losses by not introducing the new technologies like customer analytics, cloud computing, virtualisation and remote collaboration, that promise to increase enterprise efficiency, provide competitive advantage and add to the bottom line.
Ironically, if global labour costs are diminishing as a compelling reason to offshore, the need for access to a broader range of essential skills is growing. Acquiring the talent required to handle many of the disruptive technologies coming on stream can be a major challenge, especially with reduced inhouse resources, so the availability of a global talent pool is one of the things that makes outsourcing an attractive option.
Aligning IT with business
Despite already running a lean operation, for most organisations in the UK doing more with less and optimising IT remains a priority A key aspect of this is choosing the right sourcing and service delivery models from traditional hosted and managed services to shared services, hybrid onshore, near-shore and offshore options and new cloud-based options. In making these choices, however, the need to reduce operating costs in the short term must be balanced against investment in risk management programmes, continuous performance improvement, IT process integration, skills development and the other operational and business practices critical to long term success. Typically some or all of this kind of expertise will need to be outsourced.
For CIOs, the emphasis today is on aligning technology with business. Sometimes the only way to get the bandwidth – or at least the most economical and speedy – is to outsource it. Not only does this introduce valuable cross industry experience and domain expertise, it adds an important string to the CIO’s bow and provides a cross-pollinating influence that can blow away established ‘group-think’ cobwebs and can challenge the status quo.
To reengineer the IT landscape in closer alignment with business strategies will likely involve the implementation of one or several new technologies and delivery models and calls for expertise in business process improvement and alignment, sensitivity to compliance requirements and very much more. In order to avoid lengthy delays and expensive experimentation, CIOs frequently turn to outsourcing to provide tried and tested platforms.
Smaller organisations that do not have the best practice IT operational procedures of larger and more mature organisations often turn to their outsourcer to provide them. A typical problem that arises from this lack of an established enterprise process framework is that inhouse IT teams and their outsourcers find themselves operating in isolation, thus building up information silos. Ensuring the type of integrated, end-to-end flow that ensures high efficiency and minimised requires things like open communication, clear SLAs, regular service delivery reviews, performance benchmarking and structured IT governance procedures – capabilities which the outsourcer should be proactive in putting in place.
We are not saying that the days of organisations outsourcing in order to achieve cost savings (either on or offshore) has come to an end – far from it, customers more than ever expect their service providers to achieve cost and performance efficiencies. But efficiencies gained by the smart application of skills and systems, not simply through cheap labour. And increasingly, CIOs are looking to their outsourcers for the kind of value added services we have touched on above, such as continuous performance optimisation, IT and business alignment, process governance and innovation: all those capabilities that go beyond the company-specific operational functions best handled inhouse. Indeed, it is within the realms of value added services that outsourcers are increasingly realising their competitive advantage. One is reminded of the adage: “They came for cost, and stayed for value”
- Big Issues Facing Business Technology in 2013 and Beyond (whiteboxbizsolutions.wordpress.com)
- Opinion split on whether to offshore IT to China (computerweekly.com)
- Benefits of Onshore Outsourcing (developmentsoftwares.wordpress.com)
- Cloud’s role in the move from outsourcing to smartsourcing (intechnology.co.uk)
- Inshore, offshore or blended mixture: the choices for accountancy outsourcing (centriclogicblog.wordpress.com)
- Reverse Outsourcing Trend: Jobs Back in US (personagestaffinggroup.wordpress.com)
- The Truth About Outsourcing (creditloan.com)
- Is Outsourcing For You? Considerations On The Benefits Of Outsourcing For Small Businesses (prweb.com)
- Selecting the right IT outsourcing vendor is not just about tight contracts, SLAs and price (tomjsmyth.wordpress.com)
In these challenging times it is more than ever crucial to separate the real trends from fads and fashions and to be able to identify the big issues, business agendas and threats and opportunities shaping business in 2013 and beyond – and the IT that underpins these developments. In this article I shall be looking at five of the key ‘big issues’ that we, as business technology consultants, are helping our clients to address.
Global integration continues and economies around the world now respond in lockstep to a vast range of localised events and influences. According to a study from Ernst & Young, after a brief pause in 2009, globalisation has increased for the world’s largest economies and is expected to continue expanding through 2015. Given the growth projections of developing nations there is mounting pressure on developed economies to compete and even smaller businesses are being forced to reach out to a wider market. Which means revolutionising many IT and operational infrastructures: standardising systems infrastructures, improving global communications and supporting a global workforce with mobile applications.
Technology Driving Disruptions
Every business in every industry is impacted by – as Gartner puts it – the ‘nexus of technology trends’. While this has always been true it now strategic. The tension between legacy and emerging technology is impacting every environment that depends on technology: and that is just about everything, everywhere. As evolving technologies like Cloud Computing, Workforce Mobility, Social Media and Big Data come of age, they are converging to create new matrices of possibilities, challenges and disruptions.
Cloud computing is forcing a rethink of entire corporate technology infrastructures, and posing challenges about the pace and risks involved in this transformation. In terms of creating a new paradigm for business processes, its cannot be understated. However, there is an even biggest trend in play: The democratisation of how content is consumed and IT products and services are procured. For example, business tools like the iPhone and iPad are typically bought by departments, work teams or individual on a ‘BYOD’ (Bring Your Own Device) basis, which are then linked into the corporate data centre, application server, etc.
This increase in smartphones and tablets by a mobile workforce promises higher productivity, but it also creates information security challenges and requires a well-thought out enterprise framework for mobile strategies. No longer will a shortage of requisite skills or the risk of security breaches be an adequate excuse to prevent the development of mobile applications for customers and staff. Workforce mobility is here, like it or not, and it must not only be supported by encouraged.
CIO as BIO: Business Innovation Officer
The call for CIOs and their teams to be more business focused and strategically minded is not new, but 2013 could be a defining year. Today there is a higher than ever percentage of CIOs who are proactively leading the conversation with their business stakeholders around the use of innovative technology to improve processes, creating new revenue streams, improving customer satisfaction and enabling global expansion. In fact, the role of CIO has evolved to the point where a new title is gaining popularity: the ‘Business Innovation Officer’ or BIO.
As we speak, there are several forces bringing this trend to a head. In at least well-managed operations with mature methodologies, internal efficiencies and gains from outsourcing – those areas on which CIOs have traditionally focused – have already peaked. On the other hand, in order to achieve efficiencies and gain competitive edge in the current economic climate, while at the same time creating supportive environments for new working models, CIOs must think like entrepreneurs: they must have a sound knowledge of business processes and objectives, the technology needed to underpin these, and the leadership skills to ensure successful implementation.
The gap in perception between what business thinks the ‘magic bullet’ of technology can achieve and the realities of implementing new applications and transforming infrastructures has historically been one of the CIO’s worst frustrations. It is easy to say: ‘We must move our data centre to the Cloud and reduce IT costs by 25%’. But it is the job of the CIO to balance the opportunities and risks involved in IT budgeting, governance and information security and to be able to elucidate them clearly. At the end of the day the BIO must manage a constructive relationship with the business, pro-actively participate in business planning, define business-inclusive IT governance frameworks and much more.
Outsourcing for Labour Cost Differential
The days of outsourcing to achieve cost savings from wage differentials (outsourced labour being free of staff overheads such as pensions, etc.) are facing, and the trend is a return to insourcing. Yes, overhead, management and governance costs are significant and there is the issue of the local availability of an affordable and flexible workforce. However, this is balanced out by an inadequacy on the part of most outsourcers to demonstrate strategic business capabilities – after all, how can any service provider really be expected to deeply understand an individual business? A typical lack of diversity management (most large outsourcers are fairly monolithic) also makes value maximisation from outsourcing less likely, and in fact is riskier for the business. That said, there are other good reasons to outsource, such as the need to supplement skills, use specialists or to deploy new services and solutions quickly.
While this view may fly in the face of popular sentiment, we predict that social media – at least in the B2B arena – will soon begin to face the hard scrutiny of tangible results and will be found wanting. Consequently there will be a flight of the very subscribers that are the driving force of the social media platform. Investments in social media will be questioned, and the results will not stand up to value returned. The argument that social media functions as a vehicle for corporate awareness building and sentiment capturing vehicle may remain valid but not commensurate to the big spend involved. For small and new businesses, it presents a free or low cost entry to a mass marketplace, but will likely disappoint in the end due to its failure to drive business.
Having looked at our top five big issues: Globalisation, Disruptive Technology, the role of the CIO, Outsourcing and Social Media – what conclusions can we draw? We seem to be in the midst of a perfect storm of new global requirements, economic realities, emerging technologies and business transformation. Options proliferate and making sense of them all is far from easy. At the centre of this maelstrom stands the CIO – or BIO – who has never faced a greater set of challenges. But the opportunities, too, have never been greater.
- 7 Tech Trends CIOs Call Overrated (informationweek.com)
- Many CIOs moving beyond IT: survey (zdnet.com)
- IT Departments Have Become Completely Useless (businessinsider.com)
- State of the CIO Survey Shows Tech World in Flux (community.spiceworks.com)
- CIOs need strategy change to realise benefits of new enterprise tech (techcentral.ie)
- A new reality between the CMO and CIO (zdnet.com)