IT outsourcing: Will CIOs reclaim their power?
The first IT outsourcing models-single-sourced, vertical deals-promised to bring to bear industry expertise in service delivery and processes. But these all-inclusive relationships often ended up stifling competition, limiting flexibility and even increasing costs.
As the corporate IT environment grew more complex, IT leaders sought help from multiple vendors to meet their needs for technical skills, geographical coverage, and competitive rates. But this "maze of outside vendors" has proven difficult to manage, says Arjun Sethi, vice president and partner in charge of A.T. Kearney's strategic IT practice. CIOs in multi-sourced IT organizations continue to struggle; there's no single view of processes, no automated exchange of information between vendors, no consistent SLA management-all of which lead to escalating management costs.
But that's all about to change, according to Sethi, who says the tipping point will be the adoption of independent cloud-based IT service management tools. These systems will not only streamline vendor relationships and service management, he says, but also enable CIOs to reassert control over IT by taking the process piece back in-house.
CIO.com talked to Sethi about his predictions for the future or corporate IT power and the IT outsourcing model he envisions for the future.
CIO.com: IT outsourcing has always been fraught with management challenges for corporate IT. What are the biggest changes you've observed in this area in recent years?
Arjun Sethi: We have observed several key changes in the last five years that have fundamentally changed the structure of the IT outsourcing market:
- It service quality is now judged more based on achieving the desired business outcomes than the underlying technical performance and availability. The distinction between business outcomes and IT performance has largely disappeared.
- IT services are delivered in a more integrated manner from different locations around the globe-or virtually.
- New vendors are challenging traditional outsourcers with solutions that deliver capabilities at a lower price point.
- The need to manage IT operations seamlessly across a multi-vendor environment has increased.
CIO.com: You look at the new tools and changes taking place in end user service management (EUSM)-one of the first areas of IT to go out the door-as a bellwether for the rest of IT services. What are you seeing?
Sethi: Cloud-based EUSM tools provide a unified view into the root causes of incidents for tracking, measuring and improving performance-cradle to grave-from both end user and vendor management perspectives. They have put the CIO and their IT department in the driver's seat by enabling them to view the delivery process from issue initiation to problem resolution, regardless of which or how many vendors perform a given task. Empowered by cloud delivery and process commoditization, enterprises have real potential to take back control of their EUSM choices. We believe other towers of service will follow.
CIO.com: You say that now is the time for CIOs to take back control of IT processes and vendor management. But having outsourced a significant portion of IT to date, have they retained the skills necessary to do this?
Sethi: That's perhaps the most important question. It is both a risk and an opportunity. Indeed, with all of the outsourcing over the last many years, organizations have lost some of the key content and contextual knowledge required to run their IT operations. We find that many IT organizations who are heavily outsourced sometimes do not readily have basic-and oftentimes critical-information like asset inventory or a good understanding of root causes driving IT issues. Only when a high-severity issue occurs do organizations deploy detailed root cause analysis. It takes substantial time to then figure out the problem across the entire IT stack-from the application source code to the middleware to the underlying infrastructure. More often than not, that process leads to debate and no one takes accountability because different vendors (or the company itself) own different parts of IT.
On the flip side, this is an opportunity is to take back control, rebuild the necessary skill set, and get in front of this issue, leveraging new service management-enabled opportunities.
CIO.com: You've noted that many CIOs have felt "straightjacketed" by the standard offerings of IT service providers at a time when flexibility is key. How can cloud solutions-standard by definition-be the way out?
Sethi: Cloud-based service management has many benefits to offer weary CIOs. Its proactive tools enable them to gain control over vendor relationships, experience a far greater ability to understand and serve the needs of business users, and unleash a powerful new source of information for contributing to the achievement of strategic goals. As leading organizations redirect their energies to focus on getting in shape for leaner operations and increased service quality, cloud-based service management falls well within the scope of initiatives to consider. Early adopters are retooling their capabilities to be more customer-responsive than ever before by streamlining vendor relationships, taking processes in-house, and improving process harmonization and [IT service] transparency.
CIO.com: Another emerging outsourcing management model is the service integrator model, whereby an IT service provider oversees the end-to-end IT delivery provided by multiple vendors. Is that a viable alternative?
Sethi: While a viable option, it does not solve two problems. CIOs remain at a disadvantage and are not able to regain control in few select areas that they should ideally have in-house. And the one prime vendor does end up costing more at the end; there's a higher total cost of revenue because of the margin-on-margin impact.
CIO.com: You may make the case that independent software vendors (ISVs) are the CIOs best bet for IT service management. But the IT service providers will say they know outsourcing management better than anyone.
Sethi: We have made the case for ISVs because we fundamentally believe that there is a need here to be provider-agnostic. This is how the service management fabric and its inherent capabilities will remain fungible and usable across vendors. We have no doubt that IT service providers have and are pitching their own tools. Furthermore, there will continue to be acquisition activity in this space. But the high ground is with vendor-agnostic ISVs.
CIO.com: With Cloud-based IT operations management, CIOs can tie their vendors to a common service management fabric of policies and processes. But are the traditional IT service providers capable-or willing-to adapt to this?
Sethi: The cloud-based tools require some upfront work in terms of feeding in the information you want to track and setting up processes to maintain its currency. So this does have cost and investment implications, and client organizations have to take the lead. In certain cases, clients may even need to invest in tool licenses for providers to use.
We are seeing a few such implementations and each have required a good upfront effort to baseline current performance, understand process flows and interconnects, and buy licenses. Additionally, they've had to invest in internal resource training. All of this comes at a cost but we believe this is money well spent. There is improved end user experience and an increase in productivity and business performance.
Stephanie Overby is regular contributor to CIO.com's IT Outsourcing section.
Read more about outsourcing in CIO's Outsourcing Drilldown.