Is IT outsourcing a dying concept?

By Stephanie Overby , CIO |  IT Management, outsourcing

Cliff Justice, KPMG: It really started to shift around 2006 to 2007. We are seeing a transition from outsourcing as a commodity that's very price-focused to a service that's much more value-oriented. Companies with the most mature arrangement--the ones I call "Extended Global Enterprises"--have shifted or are shifting to integrating the use of third-parties and managing that integration in a way that promotes their business goals. The result is more innovation, more new product ideas, and more new services. Who's driving this transformation--customers or service providers?

Justice: Mainly the customers. The value that service providers can offer extends to helping a company compete more effectively in the marketplace for customers--by helping with product development or entering new markets, both of which help to drive customer growth. You describe this as the "death of outsourcing." Why is outsourcing, in its present state, unsustainable?

Justice: Outsourcing became too reliant on labor arbitrage, which is a very short-sighted strategy. For example, wages in India have gone up from 10 to 14% yearly since 2009. Also, the offshore talent pool is smaller than it was five years ago, further limiting labor arbitrage as a strategy. But isn't cost-cutting still an important factor in sourcing decisions, given continued pressure on IT to do more with less?

Justice: Cutting costs is very much a driver. However, companies are demanding more value from third-party services, such as the ability of the provider to partner and move business goals forward. That's a big change from the way it was five to ten years ago. What kinds of outcomes are customers seeking from IT service providers? More importantly, are the providers capable of delivering them today?

Justice: Clients are looking for increased agility, reduced fixed costs, availability of working capital, better insights into trends they'll need to take advantage of, to name a few. Providers that are growing and excelling are aligning with their clients' industries and specializing in order to help their clients compete better. In so doing, they're becoming more valuable to their client organization. Describe the new outsourcing customer.

Originally published on CIO |  Click here to read the original story.
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