Information Technology Leadership Forum
Forum Report
Seminar 5
Trends in Outsourcing - 2008 and Beyond
Executive Summary
This paper is divided into two parts. The first part is summarized the content of seminar 5 about “Trends in Outsourcing - 2008 and Beyond”. The speaker - Professor Stephen K.M. Lau, who has a long and distinguished career, having held a variety of senior management positions with International Computer Limited, Citicorp, EDS and the Hong Kong Government where he was head of the Government Data Processing Agency. Also, He has 30+ years' experience in the information technology and banking industries in both the government and private sectors. The seminar is structured in a way that helps participants to understand the major considerations of outsourcing, what should corporations look for as desirable attributes of a service provider, and the trends of outsourcing in 2008 and beyond.
The second part provides that the trend in outsourcing strategy, what is multi-sourcing, benefit of multi-scouring. Also, the risks of multi-sourcing are identified. Finally, critical success factors with advice for organization are introduced.
1. Introduction
Nowadays, organizations face continual pressure to grow their business. In order to achieve this business growth, they must focus on their core business. Moreover, the costs associate with non-core business processes continue to rise. It makes the organizations face the higher cost. Therefore, they start to adopt the outsourcing for cost reduction. The seminar is structured in a way that helps participants to understand the major considerations of outsourcing, what should corporations look for as desirable attributes of a service provider, and the trends of outsourcing in 2008 and beyond.
2. Seminar Summary
2.1 What is Outsourcing?
Outsourcing is broader definition than facilities management to cover the contracting out of specified services to a third party within a controlled, flexible relationship. Furthermore, the customer receives a service that performs a distinct business function that fits into the customer's overall business operations.
2.2 Difference between ITO and BPO
Business Process Outsourcing (BPO) is the delegation of an IT-enabled business process to a third party that owns, administers and manages the business process according to a defined set of metrics. It is often divided into the following two types:
Back office and front office outsourcing
Offshore outsourcing
Offshore outsourcing refers to outsourcing business processes outside the country. More recently, the trend towards offshoring has been particularly pronounced in business services including areas such as telemarketing services and software development. For example, HSBC bank remain the growth of its business, HSBC had outsourced its call center to Indian and China for increasing the profits.
On the other hand, Information Technology Outsourcing (ITO) is a subset of business process outsourcing. Moreover, ITO occurs when an organization contracts a service provider to perform an IT function instead of performing the function itself which includes IT applications, Networks, Front Desk support etc. Finally, the service provider for BPO and ITO could be a third party or another division or subsidiary of a single corporate entity.
2.3 Key Benefit of Outsourcing
2.3.1 Cost reduction
Outsourcing to cheap labor cost countries such as India and China. These countries can give organization access to cost-effective services. Furthermore, those countries provide the same services with the same level of quality for a much lower cost. In addition, organization can save on every aspect of business and increase the profits. This cost-advantage has increased the number of services that are being offered to India and China.
2.3.2 Performance improvement
Many Specialist suppliers can achieve much higher levels of performance in certain activities than can be achieved internally by the outsourcing company. For instance, USA night will be India's day; therefore, organization can complete critical work and send it to supplier the next day. As a result, the work is continued by outsourcing partner even the employees go home. This can give the business a competitive advantage. Moreover, specialist supplier can also provide the outsourcing agreements is a service level agreement (SLA) that quantifies the service levels required by the outsourcing company. Moreover, the outsourcing organization must ensure that it has an effective measurement system in place to assess the performance level of suppliers on an ongoing basis.
2.3.3 Specialization
By outsourcing, organizations can spend more time to concentrate on core business by outsourcing all non-core functions such as call center service and billing service. Moreover, organization can get expert and skilled services conveniently because outsourcing partner who is specialized in that particular business process. This benefit of outsourcing has been the key reason why several organizations adopt the outsourcing.
2.3.4 Access to innovation
Organizations are reluctant to outsource because they fear they may lose the capability for innovation in the future, However, in many supply market there exist significant opportunities to leverage the capabilities of supplier into the product and services of the customer organization.
2.4 Leading Outsourcing Vendor - EDS
The biggest leaders are CSS, IBM, EDS, and HP. Several provider firms are coming to market with offerings that promise to meet all these needs just as EDS did in the late 60's with healthcare claims processing. EDS is serving clients for 45 years. Moreover, EDS was ranked No. 1 on the "Top 50 Best Managed Global Outsourcing Vendors". Nowadays, EDS has approximately 139,000 employees in over 65 countries. The EDS services covers retail, finance, government and healthcare etc. In order to enhance capability, EDS has alliance partners' support innovative which includes CISCO, SAP, ORACLE and Microsoft etc.
2.5 Outsourcing trends 2008
According the Gartner's report that “Worldwide outsourcing spending grows about 8.1% to US$441B” (from $408B in 2007) (Gartner).
In Asia pacific, IT service market is large and extremely diverse and become the geography of choice for offshore delivery centers. For instance, India and China are the fastest growing IT services markets in the world. Furthermore, IDC report that “Chinese cities are nipping at India's heels and would overtake Indian cities as the preferred destination for offshore back-office functions by 2011 in software sector; the optimism is based on government-supported massive investment in infrastructure, internet connectivity and English language training.” (IDC)
3. Literature review & discussion
3.1 Trend in Outsourcing strategy
“The swing to Multi-sourcing is a direct outcome of traditional sourcing strategies that cannot keep pace with rapidly changing business environments and evolving client needs. Multi-sourcing provides options. It allows clients to choose between best-of-breed service providers and select the right sources for IT services in order to obtain optimal business outcomes,” said Dexter Wee, General Manager iBOSS, Asia Pacific, Infrastructure Operations & Outsourcing Solutions (datacraft-asia.com.tw - Published: 19 March 2008)
As rapidly changing business environments, no one supplier can excel in all service areas. For example, Shell Signs $4 Billion, Multi-Supplier Outsourcing Deal - CIO at Shell, Alan Matula, said: "This deal is a major strategic choice for Shell. Partnering with EDS, T-Systems and AT&T gives us greater ability to respond to the growing demands of our businesses. It allows Shell IT to focus on Information Technology that drives competitive position in the oil and gas market, whilst suppliers focus on improving essential IT capability…..The value of the contracts for the three suppliers is $1.6 billion with AT&T, $1 billion for EDS and $1.6 billion with T-Systems." (CIO.com- Published: 3 April 2008)
3.2 What is IT multi-sourcing?
The following diagram shows the Multi-sourcing Model:
Customer
Contractual Relationship
Supplier
Supplier
Supplier
IT multi-sourcing is used to describe the situation where an organization negotiates the separate or parallel agreement with different suppliers for different part of IT services and may develop a framework agreement outlining how the customer and supplier will work together in the event of an outsourcing contract being signed. Moreover, the customer needs to take the role of project manager of the outsourcing for planning, organizing, and managing suppliers to bring about the successful completion of agreement objectives.
3.3 Different between Single-sourcing and Multi-sourcing in IT
The following table is comparison with single-sourcing and multi-sourcing:
3.4 Benefits of IT Multi-sourcing
3.5 Risk of IT Multi-souring
3.6 Critical success factors for IT multi-sourcing
3.6.1 Clear on the objective of outsourcing
3.6.2 Never lose control of the supplier
3.6.3 Have a dedicated team for relationship management
3.6.4 Find a trustworthy supplier
3.6.5 Do it one step at a time
3.6.6. Think twice before outsourcing core system
4. Conclusion
In order to diversification of business risks and increasing access to specialized skills, more organizations adopt the multi-sourcing instead of locking into multi-year contracts with one single vendor. Moreover, customer signs several smaller-sized deals with multiple suppliers that can deliver specialized products and services that fit the company's specific objectives. Finally, critical success factors with advice for organization are introduced to get multi-sourcing successfully.
References
1. Applegate, L.M., Austin R.D., McFarlan, F.W., Corporate Information Systems Management: Text and Cases, 7th edition, McGraw-Hill, 2007. (Chapter 9)
2. Datacraft (2008), Spend Trend Shifts as Outsourcing Moves to Multisourcing, [Online] available at: http://www.datacraft-asia.com.tw/pages/subpage3_1.asp?page=3&rptid=309
[Accessed 8 April 2008]
3. Siobhan Chapman (2008), Shell Signs $4 Billion, Multi-Supplier Outsourcing Deal [Online] available at: http://cio.com/article/328363/Shell_Signs_Billion_Multi_Supplier_Outsourcing
_Deal [accessed 7 April 2008]
