Outsourcing

Why outsource (off-shoring, near-shoring ...) they IT operations ? Maybe the answer is obvious, but its worth to make a list:

• Costs: in order to save money.
• Cash flow: selling equipment to a supplier improves the cash flow and lessens inventory.
• Share price: investors and analysts appreciate if a company is able to achieve the same financial results with a smaller workforce and lower level of assests. Outsourcing IT services can help in that.
• Culture: IT is complicated, IT girls and guys are sometimes difficult. Managers may prefer to deal with one single partner, rather with a couple of people and companies.
• Better service: a large, specialized company is able to provide better services.
• Innovation: maybe you need a partner with some special knowledge.
• Fashion: everybody is doing outsourcing, we should too.

The resasons why outsourcing  determines the kind of outsourcing:

• Financial outsourcing: The company wants to improve its cash flow, rise the price of it share or make an impression on its investors.
• Cultural outsourcing: Frictions between the IT and other departments, fashion or other reason.
• Functional outsourcing: systematically give functions to partners who do it better and cheaper.
• Dependency: the company doesn't want to depend on a couple of key employees. By standardizing and outsourcing it can decrease risks.

Every silver line has a cloud:

• Cultural frictions are typical for off-shoring; there are very good companies and very clever people everywhere in the world but cultural differences may disrupt effective cooperation . This is a burden on efficiency and drives up costs.
• For a provider your company will be only one among the thousands of other customers. Large corporation can protect their interests, but for a smaller ones... Its not a problem as long as you use only standard services and have standard expectations.
• Outsourcing core functions can be dangerous. You will depend on an other company, and give your special knowledge to somebody else.

Outsourcing initiated by financial or political reasons is not our subject. The question is whether IT has a strategical importance (it has). If yes, the next step is to define what is core knowledge. This depends on the company strategy. If - and i guess its so - your company strategy is not very talkative about the role of IT you should consider the followings:

• Is there any special knowledge which differentiates your company from your competitors?
• If not, is there a potential knowledge which would help you to gain competitive advantage?
• What is your companies plan for the future?
• What is where a partner can provide more?

There is a ripe and technology intensive industry; the car industry. Car manufacturers have a production depth of about 30% in average, but for some its twenty percent and in case of Porsche for example is down to 10%. In my opinion - depending on industry - IT departments should have similar production depth. Functional outsourcing and standardization is the key; you should standardize and outsource everything which is not a core function. Its a step by step process; first very simple and standard things should go out, then the more complicated things may follow. During this process you may discover that some functions are better done in house while other are easier to do outside than it was thought originally. Outsourcing - if well done - can increase productivity significantly.

When to do outsourcing and what? This question can be interpreted in the following dimensions:

• Strategic importance
• Internal know-how
• Dependence on the partner

From this three factors the business strategy is the most important. If a function has a large strategic value it should be in-sourced, it there is acceptable internal know-how. If both are low, outsourcing is a clear choice. In the middle strategic importance or with little know-how functional outsourcing is the solution. You should keep key elements of the process in your hand and outsource well defined, measurable functions. In practice functions with low level of know-how and low strategic importance should be outsource first, and the dependency on outside partners should be increased step by step. Of course we should know what we expect, and be able to check the results. ITIL can help.