11 outsourcing myths debunked

Outsourcing has evolved — and so too have the misconceptions around what makes a successful sourcing partnership in the digital era.

11 outsourcing myths debunked
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Entering its third era, IT outsourcing is at a significant inflection point. Its first 20-year era was marked largely by the quest for operational excellence. Much of the next 20 years was dominated by the rapid, widespread adoption of offshoring and labor arbitrage. Now, the as-a-service era sees consumption-based outsourcing becoming the norm.

Meanwhile, the COVID-19 pandemic has rattled the IT outsourcing environment as well. IT leaders are rethinking their sourcing approaches. “In effect, everything is on the table,” says Jimit Arora, partner at Everest Group. “Every aspect of the solution portfolio is being re-validated and the existing cost pressures are causing companies to take a fresh look at the different strategies in the outsourcing portfolios.”

Moreover, as enterprises accelerate their shift to a fully digital operating model, they are becoming much more reliant on their IT service providers, says Phil Fersht, CEO of outsourcing advisory and research firm HfS Research.

At this time of tremendous market activity and decision making, it’s important to take a look at the new realities of outsourcing. Even with outsourcing a mainstay strategy in IT, misconceptions persist. Worse, new illusions have emerged as outsourcing approaches continue to evolve. Achieving desired outcomes when working with third-party providers depends on clear-eyed understanding of what’s possible and what’s not, what responsibilities remain with the buyer and what new capabilities are required, what’s changed about outsourcing models and what remains the same.

CIO.com talked to IT outsourcing experts who work with IT buyers and vendors to help bust some of the most common myths around outsourcing today — and to aid IT leaders in setting up their latest generation of outsourcing engagements for success.

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Myth: IT outsourcing is dead

There is a commonly held notion that IT outsourcing is no longer a valuable strategy, and cost savings have evaporated. While it’s true that IT outsourcing, as we had come to know it, may indeed be dead, the next generation of outsourcing deals could deliver even greater rewards for forward-looking CIOs.

Global annual contract values for outsourced managed services deals declined by 16 percent in second quarter, but the overall as-a-service market grew 7 percent. IT outsourcing isn’t dead; it’s evolving.

“The pandemic highlighted the continued concerns with operational resiliency, which continues to increase cloud adoption. The shift in automation and full-stack development also saw a significant increase in innovative solutions to achieve costs savings faster,” says Steve Hall, president of EMEA at outsourcing consultancy Information Services Group (ISG) and a partner in its digital solutions group. “In many ways, the pandemic has been a shining moment for the overall outsourcing industry as suppliers rapidly shifted to work-from-home models and demonstrated exceptional collaboration and innovation during this period.” 

Myth: The old ways still rule

Veteran IT leaders may think they know everything there is to know about structuring engagements for success, but the reality is that the fundamentals of value creation from outsourcing have changed significantly. “We are seeing a strong desire from enterprises to shrink their cores and focus on a more flexible operating model and this will likely increase in the coming months,” Fersht says.

Consumption-based pricing is replacing fixed-price models. Contracts designed for efficiency and cost reduction have given way to deals aligned to business outcomes and growth.

“The fundamental mindset needed to succeed is very different, and a contract written for efficiency does not align with a contract that needs to drive growth,” says Arora. “Smart clients recognize the limitations of previous templates and are willing to make changes. Clients that want to simply repurpose because they think it is ‘old wine in new bottle’ are going to struggle with ineffective contracts.”

Over the past six months, trust and relationships have become the true currency in outsourcing. “No contract envisioned the complete global economic shutdown cause by COVID-19. Enterprise organizations, outsourcing advisors and service providers didn’t have time to renegotiate new terms or service-level agreements. Everyone understood the human tragedy that was unfolding and worked together to protect employees and safeguard corporate assets,” says Hall. “Service providers supported global operations, reduced fees, extended payment terms, and generally supported their clients. We will continue to have debates on details, pursue outcome-based contracts, negotiate pricing and gain-share clauses, but the last six months have taught us the importance of trust in sustaining relationships.”

Myth: Agile and DevOps are not possible when outsourcing

The digital era demands faster adoption and increased agility and both IT outsourcing customers and service providers must adapt. “Companies and their providers that do not embrace this new paradigm will be left behind and it will impact their businesses,” Hall says. “Create a strategic program with your key providers, bring them into your strategy, and develop your digital future together. Companies cannot do it all alone; strategic providers are critical to making the leap to the agile enterprise.”

Indeed, agile has become the preferred approach for many organizations. “Collaboration is even more important as teams work remotely, allowing better integration and new technology solutions to be rapidly implemented,” says Hall.

Myth: Outcome-based pricing is for everyone

While most clients will say they are ready to pay for outcomes, what they really want is output-based or transaction-based pricing, says Arora. “It is a rare client that can link outsourcing value into business outcomes beyond cost savings. Creating programs that align to true business outcomes are difficult when an IT service provider has control over only part of the input. Even when they can, there ends up being disagreement over who really contributed to the business outcome,” says Arora. “Consequently, clients may take outcomes but can rarely align that to what it means and the price they are willing to pay to achieve that outcome.”

Myth: Outsourcing IT means outsourcing responsibility

This is perhaps the most enduring of outsourcing myths. “Nothing can be further from the truth,” says Ollie O'Donoghue, research director with outsourcing research firm and consultancy HfS Research. “There are a plethora of outsourcing [horror] stories that involve a business handing over control of their IT to a provider much to their lament.”

“Active client involvement to ensure provider performance through governance and collaboration is essential to ensure the results anticipated in the outsourcing relationship are achieved,” says Hall of ISG. Typical service governance costs amount to 5 to 9 percent of the annual contract value of the deal, according to Cecil.

Myth: It’s all about the rates

Fixating on rates is unhelpful. “True value leakage does not happen because the rate cards are not aligned; rate cards are usually competitive,” says Arora. “It is overconsumption — whether intentional or not — which causes value leakage.”

Myth: Companies that outsource IT lose their best employees

There has always been the risk of employee loss, with those who are fearful or uncertain about the impact choosing to leave the organization or the shift of internal employees to the provider. However, both possibilities have become less likely in recent years.

“A meaningful and empowered organizational change and communications program is the best mitigation for the loss of key people and the growth of misperceptions about the sourcing,” says Hall. “The best advice is to communicate to employees early and often the benefits of outsourcing and help them understand how they will be a part of the change.”

In addition, service providers today only rarely rebadge client’s existing staff as their own. “In most areas, service providers have already built out their core offerings and are not looking to invest in anchor clients and rebadge employees,” says Cecil.

Myth: Location consolidation is a good idea

Two years ago, enterprises were working hard to minimize their outsourcing geographic footprint. But business continuity concerns highlighted by the pandemic have IT leaders rethinking that strategy, and instead spreading services not only across multiple locations within the same region but across diverse geographies.

“COVID-19 has brought the need for outsourcing location diversity to the forefront of the conversation. Enterprise clients are now taking steps to ensure redundancies throughout their service delivery capabilities across multiple geographies,” Tanowitz says. “This is important not only for services that require stakeholder interaction ­— whether internal interactions involving employees or external customer interactions — but also for business resilience.” 

Myth: Automation is the key to future outsourcing savings

Many clients assume that robotic process automation and other forms of automation will unlock the next generation of savings in their outsourcing deals.

“While automation creates tremendous value, nine times out of ten, automation is being applied to an inefficient process which results in a faster and cheaper inefficient process,” Arora says. It’s not a silver bullet. Only automation combined with business process transformation can enable breakthrough value. “If done correctly,” says Arora, “the environment is simplified or digitized to the extent that you probably don’t even need to outsource it anymore.”

Myth: Digital transformation deals are costly

In fact, digital may become less expensive. “The whole point of digital is to conduct operations much faster, cheaper (e.g. with less people), more efficiently, and with much better data to make critical decisions,” says Fersht. “We are starting to see deals where service providers are absorbing some of the upfront transformation costs of digital as they know that can make it up further down the line with the outcomes the client can enjoy.”

Myth: Outsourcing is getting easier

As IT outsourcing has become more mainstream, some assume it has become commoditized. That’s not the case, says Pace Harmon’s Tanowitz, who has encountered clients asking for best-in-class templates to create an outsourcing deal quickly.

“The reality is that outsourcing isn’t standardized and every deal is unique to each client’s business, technical, functional, and financial requirements. And that just addresses the deal structure,” Tanowitz says. Once the outsourced operations begin, things get even more complicated. The retained responsibilities may not be the same activities as performed in the current state. The skills required to govern an engagement aren’t necessarily the same as those required to manage the operations. Internal lines of responsibility can become blurred.

Long story short: Outsourcing isn’t getting any easier. “It is still a transformational and complex business transaction that needs to be diligently planned and managed,” Tanowitz says.

Copyright © 2020 IDG Communications, Inc.

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