Staying competitive with outsourcing – panacea or problem?

Once interested in developing and customising their own systems, more companies are accelerating their use of outsourcing to keep up with fast-changing technology. But is this the silver bullet that it is touted to be or just another problem in disguise? 

Outsourcing is no stranger to large banks chief information officers, who long ago changed the view that they needed to build important information technology systems in-house. Many other financial and other service provider firms eg accounting, hedge fund managers, law firms, health providers, utilities etc, have adopted this trend, as this seems to be the right thing to do. The ongoing financial crisis, however, appears to have hastened the trend as financial institutions face increasing pressure to keep pace with technological advances.  

The market pressures to be more agile and to accommodate fluid economic changes are to driving organisations’ need to source externally rather than try and build in-house.  

Virtually all software providers eg HP, IBM, Intuit, Microsoft, Oracle, SAS, et al are now offering software-as-a-service. Couple this with their cloud facilities and the enticements are very appealing indeed to outsource your IT if not other parts of your organisation’s non-core activities. Non-core or differentiating activities should be leveraged from outside is the clarion call, but should you jump headlong into this or carefully consider your move?  

Nowadays, many executives are looking at how IT plays a key role in their company’s ability to offer relevant and innovative products for customers, and how the organisation can best capitalise on recent technology changes.  

Part of this change is a move from professed “best-in-class” products to more integrated solutions, which offer firms the ability to implement solutions with less customisation. For example some companies have embraced the full spectrum of Microsoft products such as Outlook, Word, Excel, and SharePoint for the firm’s use. Essentially they piggyback on Microsoft’s innovation. 

However, when critical core systems are considered, firms should be well advised to still look for vendors with “strong underpinnings”, deep technical expertise and the “financial capacity” to ride out the good and bad economies.  


Core of the matter 

Taking advantage of more up-to-date technology is driving many firms to look externally even when it comes to their most central functions, specifically their core IT systems. Today, only a few of the largest institutions continue to develop their core systems from scratch in-house. 

While some organisations’ IT budgets are slowly starting to recover as the US pulls out of the recession, the drive to lower costs and achieve more with less continues to keep CIOs fixated on the cost economics of technology adoption. The global economic picture is not as rosy however, with the EU predicted to move into another recession with its attendant problems. Hence, for multinational companies this fixation may not be companywide, so system integration problems may arise.  

Detractors of IT outsourcing claim that no outside vendor can match the responsiveness and service levels offered by an in-house function, mainly because the vendor is not under the same management direction and control as employees. In addition, there are concerns with outside vendors about confidentiality of data, strategic applications and provisions for disaster recovery.  

Recently, several incidences of identity theft, hacked systems, stolen and lost mobile devices with sensitive client information have occurred at alarming rates. This has lead to increased regulatory concern about the financial industry’s ability to preserve confidential data. Naturally, this has caused the enactment of data privacy and protection laws in many jurisdictions, with severe penalties for organisations that breach these laws. Therefore, executives need to verify, “who has my data?” especially when using cloud-based services.  

Companies that outsource often are unpleasantly shocked to learn that their vendors aren’t working on their projects – someone else is, or that the cloud is very nebulous. Outsourcing vendors, in seeking rare technical skills, often subcontract parts of their IT work to small, unknown companies, oblivious to their clients. These subcontracts can pose problems, involving viruses loaded by subcontractors, poor communications, high costs and low-quality service. 


Choose wisely  

Outsourcing major IT functions will continue to grow quickly. The ongoing strong growth of both the depth and scope of IT outsourcing implies that this management practice is more than just a passing trend and that, given the right circumstances, IT outsourcing may provide the advantages proposed by its advocates. For companies that have successfully outsourced various IT functions, the question is not should we outsource, but rather how much should we outsource?  

However, IT outsourcing is not a panacea for all IT problems; a company cannot wish away its problems by outsourcing them; in some situations, it may create as many problems as it is intended to resolve. Any internal problem has to be carefully studied. The aim of management should be to identify the root cause of the problems and not treat the symptoms through outsourcing. If the causes are more deep-set with more historic origin, it will be reckless to expect an outsourcing vendor to solve them. Therefore, root cause analysis must be done meticulously and the option of outsourcing considered bearing in mind the long-term strategic objectives of the company. 

Given the important implications of IT outsourcing, business leaders should carefully weigh the risks and benefits of this management practice when considering their operations and working with IT vendors.