IT Outsourcing turns 21, but has it come of age?

Allan Dickson, Consultant at Compass Management Consulting (image: file photo)

In 1989, the first landmark IT outsourcing deal was signed between the Kodak Eastman Company and IBM, gaining worldwide attention. At the time the deal was heavily criticised, and the then CIO of Kodak, Katherine Hudson faced scorn from her peers, who feared that by abdicating responsibility for IT to an outside provider, she was undermining the company’s power.  However, despite the seemingly counter-intuitive nature of the move, it turned out that this revolutionary idea was more than just a flight of folly.

By outsourcing IT to a specialist provider, Kodak could focus more strongly on its core capabilities, ensuring that IT did the job it was designed to do while the people within the company could get on with doing what they did best, which certainly was not running a data centre. The Kodak Eastman and IBM deal changed the game, and had a profound impact on the IT industry which can be felt to this day.

Now, almost 21 years later, there is no doubt that outsourcing has become a far more commonplace model in the IT industry. Over the years, more and more companies have signed outsourcing deals, but it is also true that some of those which outsourced their IT have brought the services back in-house at a later date.

This fairly common phenomenon leads to a number of questions. If outsourcing enables organisations to run an efficient IT shop while still maintaining a focus on their core business, why have all organisations not gone this route? Why did some companies try the model and then once more take control of their own IT services? Why does outsourcing work in some cases and not in others? What went wrong? For the modern enterprise, there is a wealth of information to be gleaned by learning important lessons from those who have gone before.

In 1989 what drove Kodak Eastman towards outsourcing was pressure to cut costs, and this driver is still relevant today. IT faces tight budgets with the expectation of doing more with less, and cost is still a critical factor in many IT decisions. Over the past two decades, has IT outsourcing matured?

Is it still as applicable today as it was when Hudson made that revolutionary decision? And if it is, is it still applicable in the same way? A lot can change in such a span of time, and IT technology certainly has.

The reality is that the outsourcing/in-house debate is still raging strongly. Even today, after that landmark deal which changed the way in which many CIOs and organisations worked, there are still a large number of CIOs who think that outsourcing is a more expensive model and that they can provide better services at less cost if they do it themselves. However this view is often the result of the way in which the IT services are provided by the vendor and managed by the client, and is not a flaw in the outsourcing model itself.

What has become abundantly clear over the years is the importance of the contract and the way in which the IT outsource contract has been constructed and governed. Ensuring price competitiveness is not simply a matter of signing a deal with an outsourced provider and then, as CIOs back in 1989 feared, abdicating responsibility entirely.

Organisations need to follow through on the promises delivered at the outset, and a number of mechanisms can be inserted into the contract to ensure that this happens, one of which is a benchmark clause. An appropriate benchmarking clause will help to ensure that for the entire duration of the contract, prices remain competitive to the market and the service continues to deliver maximum benefit to the organisation.

Twenty one years is a long time, a lifetime in the field of IT where technology changes often and the equipment used two decades ago is dramatically different compared to what is available today. If outsourcing is still an applicable model, with all of the changes that have taken place technology-wise over the years, are we still asking the right questions? Has IT outsourcing taken on a new role in today’s business world?

Understanding where IT outsourcing has come from and the lessons learned over the years by clients, by service providers, and by outsource consulting firms like Compass and TPI, one of the world’s top consulting companies, can help organisations to answer all of these questions and gain an insight into the importance of outsourcing strategies and benchmarking tools in getting the most out of outsourcing providers.

By Allan Dickson, Consultant at Compass Management Consulting

Allan Dickson will be unpacking these questions, discussing case studies, and examining the importance of sourcing strategies and benchmarking, at a workshop during the IT Leaders Africa Summit, to be held at the Hilton Hotel in Sandton, Johannesburg on 10 and 11 March 2011.