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From: www.itworld.com
Special report: Outsourcing update
February 28, 2001 —
"...and that's when it hits you, you are so ready for IBM."
Ready or not, outsourcing is in your face. These days there are no ways to avoid the CEO's question (he sees Big Blue's commercials too): Is outsourcing the panacea IBM and others claim it is?
Of course outsourcing is not new, nor is the IBM advertising theme. You might remember their old message: You'll never get fired for buying IBM. Feeling a sense of déjà vu?
But you still have to answer the CEO's query. And answer it in a way that he can understand. In other words, how will outsourcing affect the bottom line? Obviously, cost savings is not the total answer. Before answering the cost question, you must decide what makes sense to outsource. Next, factor in things like security and service (along with guarantees that your company will get what it pays for). The next step is to figure out whether it makes sense to outsource the company IT jewels: customized business applications, which add value and a unique competitive advantage.
Here's the Cliffs Notes: Yes, outsourcing can be an expedient and economical way to get IT applications up and running quickly. But buyer beware: ineffective implementation can ruin your business, and your career.
The following ITworld.com special report looks at outsourcing trends and what they mean to your company.
Trend: The rise of IT outsourcing
In today's market are four primary reasons companies choose to outsource their IT functions:
- Focus on core competencies: IT specialization is a business necessity. Because technology changes literally on a daily basis, it is much easier for companies to outsource at least part of their IT operations to a firm with IT expertise and economies of scale.
- Speed to market: Businesses want to be able to sell their product -- the core competency -- as quickly as possible. Were they to build every necessary piece of technology in-house, time to market would take years. By outsourcing IT operations, companies are able to take advantage of the rapid deployment and flexibility offered by IT service providers.
- Saving money: The more complex the operation, the more cost-efficient outsourcing becomes.
- Shortage of IT resources: The never-ending quest for skilled IT workers lands on the doorstep of outsourcing vendors. Many companies do not have the personnel, equipment, or capital to support a full technology team.
What this means to you:
If one or more of the above sounds familiar, outsourcing might be a viable option.
Trend: Outsourcing business processes
Technology companies are beginning to use outsourcers to streamline business processes. Hewlett-Packard, for example, recently hired Texas-based CompuCom to provide HP employees with internal product procurement applications.
"Our technology allows all HP employees to buy products," says Tom Ducatelli, vice president of supply chain management for CompuCom. CompuCom manages the order management as well as the logistics, distribution, and configuration services.
What this means to you:
Picking the right business processes to outsource lets your company focus on its core competencies, instead of devoting precious IT resources on more efficient ways for employees to order pencils and paperclips.
Trend: The move to customization
IT service providers are replacing their "one size fits all," plug-and-play business model with that of customization. These days, service providers will focus on specific offerings, such as a PeopleSoft application or frame-relay networks, and customize that service to a client's needs and existing technology.
"Service providers are giving clients a framework, saying 'As long as you stay between the boundaries of A to F, we can work with you,'" says Christine Ferrusi-Ross, a services analyst at Forrester Research.
Customization is not just limited to the technical services: "We look to standardize within technology and customize in business areas," says Mitch Kristofferson, vice president of marketing at California-based ASP Corio.
Another aspect of business customization is that vendors and consultants are beginning to offer outsourcing evaluation tools and services. Though there's no single formula, some vendors use elaborate ROI and TCO tools, that appear functionally equivalent to an accountant with an Excel spreadsheet.
Other third-party consultancies are beginning to offer tools such as the Deloitte Consulting decision tree, which is part of the company's packaged advisory services or Gartner's Modeling Tools. While the process and formula are still in their early stages of growth and refinement, customers are using these tools as an evaluation resource.
What this means to you:
Communication on issues such as customization, support, and services with vendors is of paramount importance before you sign the contract. If you don't have the means to perform in-house evaluations, vendor tools or third-party tools can be useful to determine if you should be outsourcing at all. Every client wants customization, but in order to secure the exact service that your company requires, you're going to have to understand exactly what service they're offering and how far they'll go to give you what you need.
Trend: Growth of one-stop shopping
IT service providers are moving in two directions, but the end goal is the same: to provide end-to-end IT services. As the IT outsourcing space becomes increasingly crowded, vendors are realizing that providing a single core IT competency is not enough for the majority of clients.
Most companies that outsource their IT operations and services are looking for hosting, development, and maintenance in software, hardware, networks, security, help desks and a range of other services -- all from a single provider.
Some vendors are trying to expand their service offerings to encompass all IT requirements, which can prove challenging. Others are refining and deepening their positions within a vertical industry, then creating partnerships with other vendors of IT services.
Corio is an example of an ASP that has partnered with multiple service providers -- which means that the company essentially outsources aspects of its service offerings.
"Every company has to brutally focus on what it does best and outsource the rest," Corio's Kristofferson says.
What this means to you:
If it's important to outsource multiple aspects of your IT operations, it's now possible to do so through a single provider. Don't forget it's still a buyer's market. Choose a vendor that can provide the level of quality and service that your business requires.
Trend: Enhanced security concerns
The single strongest objection to outsourcing IT is concern for security. For most businesses, particularly technology companies, lax security can mean the death of both the company's product and its reputation.
"You need various layers of security," Kristofferson says, adding that "if there is an attack on your system, you can see it coming in plenty of time before there's penetration into the core layers."
What this means to you:
When outsourcing security, perform thorough background checks of the IT outsourcing company. Speak to current clients and sign an airtight SLA (see below).
Trend: Increased use of service-level agreements
A service-level agreement (SLA) is the contract that seals a client's marriage to any IT service provider. SLAs have become so highly valued in the past year that some companies sell their services based on the strength of their SLAs; other third-party companies provide software that helps clients and vendors create SLAs.
In IT outsourcing surveys, SLAs are one of the most important factors in a client's decision to outsource to a particular vendor.
"There's a bit of a misnomer about outsourcing," says Daniel Ziegeler, director of outsourcing advisory services at Deloitte Consulting. "We talk about rates and service-levels that are market-driven, but you can't open the Wall Street Journal or the New York Times and point to a table that says the going rate for a CPU minute is x dollars."
Every client and every deal is unique, Ziegeler emphasizes. This means that an outsourcing customer must investigate the outsourcing vendor and hold the vendor to standards, including accountability for transaction response times or application availability. Most SLAs delineate that customers pay higher fees for quicker response times and greater application availability.
While some service providers have set startup and implementation fees -- particularly with large clients, others are gaining a foothold in the market by promoting flexible payment plans. By agreeing to sliding-scale pricing or taking a percent of the client's revenue, vendors are claiming a stake in the company's performance and are therefore committing themselves to the client's success.
"We're moving away from flat rates, because what happens is that it subsidizes customers that use the service intensely and penalizes customers that are more self-managed," says Kristofferson. "What you need is an unbundled service, so that customers pay for what they use."
What this means to you:
You should have a deep understanding of the service provider market. Use that knowledge to your advantage to demand a SLA that includes: key application and network availability, response time, security, recovery, monitoring, tracking, third-party involvement, performance-based payment and reimbursement, end-of-relationship clauses, and mutual understanding of business objectives.
Trend: Rise of remediation services
IT outsourcing has been around long enough to leave a sordid trail of failed deals. As a result, third-party consultancies are beginning to offer restructuring or remediation services to patch the broken pieces.
"We're finding that almost 50 percent of the work that we're doing these days is helping clients to re-mediate deals that have gone bad," notes Deloitte Consulting's Ziegeler.
Clients, Ziegeler says, typically fail for two reasons: they outsource for the wrong reasons and they don't effectively manage the vendor. Outsourcing for the wrong reasons generally means that they outsource for cost savings alone, not for performance reasons. Those customers hoping to save money by outsourcing tend to cut corners, which consequently affects vendor performance because the vendor cuts corners too, Zeigeler explains.
Ineffective vendor management is one of the greatest reasons that outsourced IT services fail. Many outsourcing customers believe that they can sit back and let the vendor manage the project, but in fact, implementation and integration are the clients' responsibilities too. As some of the below articles suggest, managing a vendor can be nearly as great a headache as in-house implementation.
Ziegeler believes that vendors contribute to the relationship problems by ignoring or misunderstanding the clients' overall business objectives. And implementation of the overall business objectives overrides any technical details.
Service providers sometimes exaggerate their capabilities and then are unable to meet expectations.
"Often vendors will oversell their abilities," says Ziegeler. "It's the distinction between marketing and delivery."
What this means to you:
Once you hire a vendor, keep close tabs on the vendor's performance. Managing a relationship is just as important to a project's success as all of the steps that precede its formation, such as internal evaluations, researching the market, and drafting an SLA. While integration and implementation are never guaranteed to be cheap and easy, they can prove rewarding and more successful than building in-house. And while your service provider must understand your overall business objectives, so must you.
The IT service provider market
Learning about the market can provide the edge that you need when choosing an outsourcer. Find out where the industry is headed and which business and technology functions other IT professionals choose to outsource.
ASP shakeout: Fact or fiction?: Are ASPs the model of the future or just plain history? ITworld.com columnist Bob Weinstein examines the evidence.
Readers say yes to outsourcing IT functions: InfoWorld outsourcing survey gathers the scoop directly from the mouths of 100 technology professionals.
Should outsourcers be part of your IT act?: Interpreting the InfoWorld survey -- just what exactly are tech professionals saying about IT outsourcing?
Report says 2001 to be turning point for ASPs: A report from International Data Corp. (IDC) indicates that ASPs are going to do or die this year.
Are we really ready for a Web-based world?: Some people think that ASPs will replace packaged software altogether. Are they right?
ASPs: Doing business on the brink of IT industry disruption: In this ITworld.com Webcast, IDC's Clare Gillan shares three years' worth of research on the emerging ASP model and its implications for the IT industry and for customers. She examines changing vendor roles, IT service delivery models, and buyer demand.
Types of service providers
Because information technology outsourcing is a relatively new space, the service providers are still changing their business models and the way they define themselves. Service providers of every shape and size call themselves ASPs, which contributes to market confusion; other vendors refuse to acknowledge the ASP acronym and adopt another title. Find out who's who in the space and what services they provide.
Applications and infrastructure
Outsourcing e-commerce apps: Is bigger better?: This interview with Totality CTO Michael Carrier explains the company's applications and infrastructure model and states why he believes that large e-commerce apps should be outsourced.
The AIP advantage: Applications infrastructure providers offer hardware, software, and management services. AIP companies believe that there are fundamentally two service provider models: ASP and AIP. So what's the difference?
Datacenters
Selecting an international service provider: Managed data services are on the verge of a growth explosion, but choosing one for international communications is a daunting task. How do you find a service provider that can keep up with your global growth?
Networks
Users consider outsourcing their VPNs: Virtual private networks are a hot topic these days, and more vendors are offering outsourced VPN services. Find out why IT companies are seriously considering adopting and outsourcing VPNs.
The pros and cons of outsourcing DNS administration: In this short-subject Webcast, Neohapsis consultant Greg Shipley discusses the process, security concerns, and possible resolutions to DNS administration and addresses the question of whether or not it should be outsourced.
Types of services: Learn what to look for in a service provider when outsourcing your WAN infrastructure. Contrary to popular belief, the largest provider isn't necessarily the best.
Security
ASPs tout advanced e-business security: As security becomes a primary concern for customers, ASPs are delivering increasingly sophisticated options -- and just in time.
IT security: To outsource or not?: This thought-provoking debate about whether or not to outsource IT security touches upon all the key arguments on both sides of the coin.
Users warming to outsourced intrusion detection: Putting in technical safeguards to spot network intruders or detect denial-of-service attacks at e-commerce servers is a prudent idea. But if your staff doesn't have the time or skills to install and monitor intrusion-detection software, you might consider outsourcing the job.
Wireless
WASPs best for balancing mobile madness: Wireless application service providers usually offer at least two of the following functions: wireless connectivity services through a common wireless portal; hosting and managing an organization's wireless applications; application development and hosting; and third-party wireless application hosting.
The incredible shrinking app: This article reviews the challenges of setting up wireless networks, selecting mobile strategies for network execs, and deciding when to use a WASP.
Tutorials: The process
You've looked at the market, and you've looked at the types of service providers. The following articles walk you step-by-step through the process.
Build or buy: Perform an internal evaluation
Should you build or buy IT solutions?: An overview of the benefits and risks of outsourcing IT functions and what you can do to manage the risks before they consume you.
Is an ASP right for your business?: In this ITworld.com Webcast, IDC analyst Amy Mizoras reviews the definition of an ASP, highlights critical factors to consider before outsourcing, and shares predictions for the future of the ASP market.
Choosing a service provider
Will your ASP bite the dust?: Obviously you don't want to spend your valuable money and resources on an ASP that's going to bite the dust. By asking the right questions, you can learn whether a vendor is on its way out before you hand over the company credit card.
Picking a winner: Choosing the wrong service provider can mean the end of your company. Learn how to choose a vendor that will both survive and help you achieve your business objectives.
Customers can find happiness with the ASP model: When the ASP Industry Consortium announced that it would begin policing itself, it took a giant step forward on behalf of ASP customers. But you can't entirely rely on an external organization, and the best way to protect your company is by understanding what you're getting into from the outset.
Avoid ASP imprisonment: Choosing an ASP means considering factors such as vendor history, trust, and confidentiality. Review this step-by-step guide to picking and managing an IT service provider instead of taking a leap of faith.
Service-level agreements
Service-level agreements: Learn how to flush out every aspect of your SLA by focusing on the key points and avoiding obscure language.
Round and round goes the outsourcing game: A crucial element in your SLA is pricing, and customers are discovering that this can be customized to suit their exact needs. In order to draft your pricing structure, you must know if you're looking for flat rates, user-based payments, or revenue-sharing price models.
Buzz issue: the sketchy promise of extended SLAs: Some SLAs provide clauses that allow the service provider to extend the agreement to partner vendors. Don't allow yourself to get caught making payments that you never agreed to in the first place.
Managing your service provider
Keeping your IT partners on a short leash: The best way to ensure your IT project's success is vigilance. Even when you outsource to an external party, you should retain control of your project and make sure that your vendor is performing up to standard.
Sweating the details: Once you've chosen your service provider, you've still got to worry about integration and implementation. Learn about potential obstacles to service provider deployment and key concerns that other outsourcing clients face.
Management strategies: When companies outsource to an ASP, they often think that the service provider will take care of everything. But they're wrong. Learn how to make the partnership with your service vendor succeed by managing the project and the vendor the right way.
Other resources:
These Web resources will help you to further understand the service provider market and models and select the optimal vendor for your specific IT needs. Good luck!
- ASP Industry Consortium
- MSP Association
- IDC ASP Advisor Newsletter
- All About ASP
- ASP Street
- Search ASP
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