Outcomes focus shakes up outsourcing
- 06 October, 2010 22:00
Inhouse, outsourcing, multi-sourcing, discrete outsourcing ... For a long time, the industry has been divided in its view of outsourcing. Some aren’t in favour of it at all, some are, and there has been exhaustive discussion and comparison over which type is best. We have seen monolithic engagements such as those at Telecom, Westpac and Fonterra, and we have seen outsourcing in its simplest form with desktop or software support fiercely contested. And the end goal? I suppose it has been to achieve certain objectives, almost all of which are operationally focused.
Something I’ve noticed on the rise in 2010 — and this is really a reference to a discernable increase in an already rising trend — is a focus on outcomes. Companies have dabbled in all sorts of objectives for IT services — from cost reduction and service level agreement-based engagements, to buying power and a focus on the core business. It is interesting that in the past, outsourcing was the preferred format, and in some cases the only way to achieve these. But as outcomes become the focus, so it seems, does flexibility.
Outcomes are always important. But the trend we are seeing in the market now is more about outcomes being the key performance indicator for the engagement. There has always been a degree of interest in shared risk engagements – and there are a number of different guises these can take. The simplest of these is the fixed price engagement.
But these shared risk engagements have never really taken off in New Zealand. The first conclusion people draw is that the risk will be taken on by service provider — with perhaps a small slice of the upside (or business savings) on offer for successful delivery.
The tendency has been to go for the extreme, or for customers to use shared risk as a stick to beat suppliers with. But I believe that the change we are starting to see in the use of these constructs is the result of toned down expectations on both sides.
In the past, the best way to drive cost down and to get benefits from specialisation, and economies of scale offered by specialists, was to outsource. However, I have seen a number of cases, where similar economies are being driven out of project based engagements.
Customers are prepared to trade off paying a higher daily rate over the course of the engagement to compensate for a fixed price agreement. And service providers are accepting deals that will see them earn a slice of the profit or savings if they deliver as per the business case. With a little creativity, deals can be structured to provide upside for both customers and service providers.
So with better pricing, and greater flexibility on offer for project-based services — where does this leave outsourcing? Will this force greater flexibility, and greater accountability into the outsourcing world, or will it highlight some of the less favourable traits of traditional outsourcing engagements. I expect companies will at the very least change the mix, and increase the smaller, project-based engagements.
I am a firm believer in outcome-based engagements, and the good that they can do for the industry. It is Darwinism for the business world — those that can’t perform won’t survive, but those that can will prosper.
However, in practice, balance is the key. Customers need to be realistic in their expectations of shared risk, and service providers need to stand behind their staff and their services and be prepared to deliver what they say they can deliver. If they can’t, it will cost them — literally.
With better pricing constructs on the rise, and greater flexibility in negotiation — will see start to see a move away from outsourcing? There won’t be a move across the board. There is a place for outsourcing in the case of commodity products, and when purchasing on a large scale. But for higher value services there are other ways to skin the cat. Customers will demand, and get, greater flexibility, better pricing and above all, a means to control performance and business outcomes.