The rationale behind outsourcing IT services

This article in Mark Vernon's series on IT services outsourcing focuses on the underlying rationale for making the outsourcing decision. Read what some of the experts have to say about balancing competitive advantage concerns with the cost and management benefits of outsourcing.

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In this series on outsourcing IT in the financial services industry, I have looked at the process of negotiating an outsourcing deal and taken a closer look at one particularly successful area—Business Process Outsourcing (BPO). In this article, I want to look a little more closely at the rationale behind outsourcing IT services and making sound outsourcing decisions. The trick is to balance the possible benefits, such as streamlining processes and reducing costs, with the associated risks involved in weakening your competitive advantage by outsourcing a critical component of the business.

The challenge for CIOs

Now that CIOs have weathered the budget shortfalls of recent years and can once again prepare for growth, there is still pressure to prove that any IT spending contributes to actual business growth: delivering more business intelligence to the organization, enhancing business processes, and engaging customers. And, underpinning it all, they must deliver reliable and robust IT services to the organization.

The modern, online organization is crippled when IT services fail. At a basic level, if e-mail goes down, then so does much business activity. At a higher level, if a new IT application is delayed, then so perhaps is a new product or a new route to market—thus compromising competitive advantage. In short, if the IT department spends most of its time struggling with routine IT services, then it will have no time to move onto the higher demands the business makes of it—better business intelligence, better processes, and a sharper focus on the strategic goals of the business.

It is against this background that the outsourcing of IT services should be understood: desktop services such as e-mail; back-office services such as storage; mid-office services such as security—these form the fundamental IT services that the business requires 24 hours a day and which the IT department fails to deliver at its peril. The rationale behind outsourcing IT services is that, rather than struggle inefficiently with these services internally, source them externally from an expert.

A good case in point is Lloyds Trustee Savings Bank (TSB). In 2003, it signed a two-year managed intrusion detection service (IDS) contract with Unisys. "As our customers want to transact 24 hours a day, we need to protect ourselves from any attack that may lead to our services being unavailable," said Bob Spencer, Head of Group IT Security and Risk at the bank. Lloyds TSB cannot risk being vulnerable to hackers, but IDS is costly and arduous to deliver in-house. So, the bank outsourced the service to Unisys, which has the expertise and economies of scale to deliver it both reliably and efficiently.

"We already tried to implement IDS in-house and found that we were unable to assign the resources required to effectively manage and monitor the system," continued Spencer. An outsourcing vendor like Unisys handles the hiring and training of skilled personnel; and keeps up to date with new vulnerabilities, new hacker tools, new security products, and new software releases.

Strategic sourcing

If IT services outsourcing makes sense on paper, it is vital to source the service from the right provider in practice. This is often called strategic sourcing, and it can be hard to get right (little wonder, then, that at Gartner's Outsourcing and IT Services Summit in London in April 2005, the strategic sourcing sessions were consistently the best attended). Basically, strategic sourcing means that an organization considering an outsourcing solution should evaluate not just different providers, but how a particular provider matches with its business needs.

Companies need to think about what services they have to keep in house to preserve their competitive advantage, and what IT services and processes are best to outsource for cost-cutting and efficiency reasons. Depending on your business and what you are trying to achieve, the answers are different for everyone.

Gartner V.P. and Chief of Research in IT Outsourcing Linda Cohen pointed out at the conference that the financial services industry is at something of an advantage here, because they have being outsourcing IT services for longer than most business organizations. Experience is the best teacher in many areas of life; and Cohen recommends that you listen to your own experience and choose IT service providers wisely.

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