Devil's Advocate: Outsourcing lessons

Martin Brampton shares his views on the latest outsourcing trends and how companies should approach such partnerships to ensure they are a success.

Outsourcing has come a long way since the first claims that it will take away problems and cut costs. ABN Amro has recently illustrated one interesting feature by signing up to a group of separate contracts. Smaller buyers need to take account of this principle too.

One general principle became evident as soon as the first IT outsourcing deals went into operation: there is a pressing need for the buyer to adopt intelligent policies and to put significant resource into managing the contract. Supposing that IT was a problem which could be handed off to somebody else was quickly shown to be a dream.

Likewise, the cost cutting often turned out to be illusory. Nowadays, it is only one objective among several, and not always the most important. With stress on corporate innovation through IT, cost control remains a significant but not overriding factor. And although some contracts have demanded that the provider innovate, it is extremely difficult to write an adequate contract term to put that into effect.

The push towards more sophisticated purchasing has recently been given further impetus by the decreasing willingness of suppliers to work across the whole spectrum. At one time, it was possible to have IBM as near enough the sole supplier of equipment and services. With the sale of the PC division and increasing selectivity about service provision, even IBM can no longer operate in that way.

Gaining real impact from IT demands a dedicated and skilled in-house team, even if much of the actual provision is bought in. This is especially so if there is to be real innovation. Service providers trumpet their ability to implement best practice but that is only a way to follow the leaders. Being a leader is always harder.

To the extent that there are truly broad-spectrum providers, they are necessarily large. As such, it is difficult to exert leverage over them, leaving many customers with limited bargaining power. Combined with the growth of many excellent IT services companies in specialised sectors, there is good reason for many organisations to follow ABN Amro and split up the outsourced purchasing.

This is especially so for smaller organisations. Managers may be tempted by the philosophy that nobody ever got fired for buying from so and so. But that kind of policy is less and less effective. The apparently safe choices do not always want to bid strongly for smaller contracts. Even if they do, their commitment may be suspect.

So, while there may be more work required, the purchasing of a basket of services from the smaller suppliers who are leaders in specialist sectors makes a lot of sense. In many areas there are good suppliers who are still hungry for new business and motivated to succeed in their chosen area of provision. It is not usually too difficult to see where the splits might be made for most customers.

Apart from looking for a higher level of commitment allied to deep skills in the sector, this approach makes it less disruptive to deal with any failing contract as it has less impact on the customer than a comprehensive deal. There is also more scope to decide to operate some functions in-house in combination with other outsourced facilities.

The market for services seems likely to grow more complex, not less. Knowledgeable buyers with good negotiating skills will achieve the best results. Anyone looking for an easy route to success is likely to be disappointed. But they always were.