Who was Tenzig Norkay? If you said "One of the 20th century's most famous outsource providers," you're correct, although badly in need of a vacation. Norkay helped Sir Edmund Hillary get to the top of Mount Everest, yet the anonymity of this Sherpa guide towers over his achievement. So too the growing legion of outsource providers, who play an increasingly important role in many corporate missions, yet enjoy none of the buzz lavished on sexy new technologies or managerial trends du jour.
What attention they do receive usually stems from the size of a few noteworthy contracts. This was true in 1989, when Rochester, New York-based Eastman Kodak Co. put outsourcing on the map by announcing a 10-year agreement with IBM Corp., and it remains true today — last December both Exult Inc. and EDS Corp. put out breathless press releases announcing deals worth more than $1 billion.
But huge contracts tell only a small part of the story. Over the past decade, the dominant players in outsourcing, which include IBM, EDS, Computer Sciences Corp., Arthur Andersen (now renamed Accenture), and a few others, have been joined by hundreds of new, smaller players. They may specialize in a business process (Exult offers a wide range of human resources services, for example) or in E-commerce, or offer software applications in an ASP (applications service provider) model, or network, storage, security, and a vast number of other services that can be lumped together as "XSPs."
Indeed, despite the fact that the outsourcing market declined last year after a Y2K-fueled boom in 1999, it is poised to gain significant ground over the next half-decade. Market research firm Input says the total market, encompassing traditional IT outsourcing, business process outsourcing (BPO), and processing services, will grow at a 19 percent annual clip from now until 2005, eventually topping $260 billion.
Juggling Partners
The advent of so many new players means that companies can outsource almost anything; they can quite literally become virtual. But tapping a growing number of partners for services both mundane and cutting-edge poses a new set of challenges: How will companies choose wisely and make sure that all those partners can not only hold up their individual ends of the bargain, but also work together to make sure a client's needs are met?
For answers, one need only revisit that historic Kodak deal, which proved remarkably prescient. "People tend to forget that we didn't do just one deal at the time," says current CIO John Chiazza, "but three." IBM got the bulk of the assignment, and all the press, but Digital Equipment Corp. (DEC) provided some network services, and Businessland addressed key elements of desktop computing.
Parceling out critical parts of its IT infrastructure to three different companies, each of which was as new to outsourcing as Kodak itself, was not without risk, and Chiazza readily admits that some "battle scars" resulted. The most critical lesson, that a company, in Chiazza's words, "can't manage technology by parts, but by how the parts come together," is instructive for the many companies today that suddenly find themselves in possession of an entire portfolio of outsourcing agreements, often stitched together with little thought given to overall strategy.
Kodak may have made some mistakes — its arrangement with DEC, for example, proved highly unsatisfactory, and that business was transferred to IBM as soon as contractual terms allowed — but it also did several things right. For one, it established at the start what Chiazza describes as a "relationship management group" to foster good communication between Kodak and its outsourcers. That has since matured into a multifaceted approach in which a dedicated group within Chiazza's IT organization researches potential outsourcers, negotiates terms, and addresses other matters of policy, while individual relationship managers interact with the outsourcing providers on a day-to-day basis.
Sounds simple enough, but, unfortunately, few companies follow this model. "There is a big difference between procurement and strategic sourcing," says Linda Cohen, a managing vice president at Stamford, Connecticut-based research firm Gartner. "Procurement is the tactical, one-off purchase of a product or service. Strategic sourcing results from developing a sourcing strategy that enables the business strategy."
Three Recipes
Cohen and others at Gartner believe that we are entering an era in which "outsourcing" should be rechristened "strategic sourcing." The key difference lies in how companies integrate a range of sourcing contracts within their overall objectives, and how they manage those relationships. Outsourcing got its start when companies went looking for someone else to handle the complexity and expense of their data-center operations. In fact, outsourcing was virtually synonymous with back-office infrastructure, but that's not the case today. "Companies now make three distinct types of deals," argues Cohen. Some are what she dubs "utility" deals, and boil down to simple economics: How can a given service be acquired most cheaply? Others are "enhancement" deals, in which price matters, but so does "speed to functionality." And on the high end, "frontier" deals have little or nothing to do with price, and are created instead to move a company into a new line of business, or to navigate a complicated merger, or to acquire E-business capabilities.
Reader Comments» Post a comment