Value chain-based sourcing of IT, part 1
As pointed out in the post below this one is the scope of IT outsourcing contracts typically driven by the IT internal focus to cut cost. Cutting cost can be achieved by economies of scale and standardization of similar activities and assets. This means that the scope of typically outsource contracts is defined in terms of infrastructure support, network support, datacenter facility management, application development or application support.
This ‘horizontal’ orientation his however not aligned with the requirements of the business processes (see illustration). Their needs cut through the horizontal IT service and process stacks. Business managers which see themselves confronted with a supply that does not match their needs triggers unhappy faces towards the IT department and the start of a creative process to get the IT services they want. The result is that business managers will work their way around the standard service catalogue by hiring their own IT staff or getting (additional) services from other vendors. I have seen it happening with a Business Unit of a large Dutch bank/insurer where the central IT department got so sluggish and unresponsive to any request that was not in the standard catalogue that the BU built its own datacenter. So far for IT efficiency by centralisation/outsourcing…
Standardisation is good, but I believe that it has gone too far in many situations. Being tied to a long term contract with an external service provider which allows only for flexibility when the client pays serious $$ is not the way to go. The market requires companies to act faster and more agile as ever before and I think that we are at the top of the ‘standard’ outsource and shared service cycle. Large companies with experience in IT outsourcing will move more towards selective sourcing arrangements. These companies can generate economies of scale by themselves and don’t need an external service provider anymore. AEGON is an example of a company which decided to insource their infrastructure services again after having EDS/HP taking care of it for more than a decade. I guess that EDS/HP has optimized as best as they could and now AEGON wants to be fully in control again by itself.
This company can achieve enough economies of scale by itself and has learned from EDS/HP everything there is to learn about managing infrastructure for operational excellence. Insourcing after outsourcing allows AEGON to combine the low cost experience and setup of their infrastructure with the advantages of being in full control again.
Full outsourcing of infrastructure, application development and the like will however continue (at least for a while). There are enough companies which have a smaller IT department or are new to IT outsourcing. They are the customers of tomorrow, but as said before do I expect a shift from large scale ‘horizontal’ scope outsourcing to selective scope contracts which balance better the needs/objectives of both the IT department and business units/processes.
To define the scope of selective sourcing contracts and services which can be standardised without hurting the business, principles of value-based management and risk management can be used. The approach allows the IT organisation improve its accountability towards the business by aligning its IT services with the opportunities and risks the business managers face every day. I will describe this approach in the second part of this post.
This ‘horizontal’ orientation his however not aligned with the requirements of the business processes (see illustration). Their needs cut through the horizontal IT service and process stacks. Business managers which see themselves confronted with a supply that does not match their needs triggers unhappy faces towards the IT department and the start of a creative process to get the IT services they want. The result is that business managers will work their way around the standard service catalogue by hiring their own IT staff or getting (additional) services from other vendors. I have seen it happening with a Business Unit of a large Dutch bank/insurer where the central IT department got so sluggish and unresponsive to any request that was not in the standard catalogue that the BU built its own datacenter. So far for IT efficiency by centralisation/outsourcing…
This company can achieve enough economies of scale by itself and has learned from EDS/HP everything there is to learn about managing infrastructure for operational excellence. Insourcing after outsourcing allows AEGON to combine the low cost experience and setup of their infrastructure with the advantages of being in full control again.
Full outsourcing of infrastructure, application development and the like will however continue (at least for a while). There are enough companies which have a smaller IT department or are new to IT outsourcing. They are the customers of tomorrow, but as said before do I expect a shift from large scale ‘horizontal’ scope outsourcing to selective scope contracts which balance better the needs/objectives of both the IT department and business units/processes.
To define the scope of selective sourcing contracts and services which can be standardised without hurting the business, principles of value-based management and risk management can be used. The approach allows the IT organisation improve its accountability towards the business by aligning its IT services with the opportunities and risks the business managers face every day. I will describe this approach in the second part of this post.
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