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As CIOs and their CXO peers evaluate strategies for optimizing the IT environment and improving business performance, reducing IT costs has traditionally been a primary motivation for outsourcing. But while cost savings may still be the "entry ticket" in many cases, it is no longer the winning ticket for companies looking to gain the most strategic advantage from either IT or outsourcing.

The financial benefits of outsourcing are still important, but direct IT cost savings are only a piece of a much larger picture. The impact of outsourcing is more than financial and extends far beyond the perimeter of the IT enterprise.

A more compelling reason for outsourcing is the ability to focus on the core business--and the many strategic advantages that can result.

Increasingly, companies are gaining expert support for business transformation through outsourcing. They are benefiting from assistance everywhere along the spectrum from improving transaction efficiency, to speeding up and simplifying the supply chain, and ultimately to enhancing the timeliness, quality, and cross-enterprise view of information for executive decision-making at the highest levels of the organization. This article will address each of these advantages.

Still Good Financial News

The fundamental expectation of expense reduction resulting from outsourcing is still alive and well. Many companies are taking full advantage of strategic outsourcing by improving their operating profit. Outsourcing can result in real flexibility in terms of scaling IT people and services.

For example, if you need more capacity, buying it from an outsourcing partner often means paying only for what you use and not investing scarce capital resources.

An outsourcing partner with global reach can enable an IT delivery model that not only lowers cost, but delivers global consistency. This model also improves IT's service to internal business units and can raise the quality of service to external customers--delivering the potential for revenue enhancement in a competitive marketplace.

Enabling a Core Business Focus

Financial benefits are important, but they are just one aspect of the value of outsourcing. Increasingly, companies are turning to outsourcing to maximize their ability to capitalize on the strategic importance of IT.

Clearly, if a company is devoting a lot of attention to non-strategic operational IT issues, that can dilute the focus on things that really matter. Today's increasingly competitive global marketplace requires a rigorous focus, and information technology outsourcing enables the company to apply scarce talent and energy on its core business.

In addition to enabling a focus on strategic issues, information technology outsourcing can provide higher levels of service. Outsource partners can make enormous investments in facilities, expertise, and sophisticated processes to provide such things as redundancy, advanced technology, and leading-edge software services. As a result, they can improve the speed, quality, and reliability of IT services and business processes for the entire corporate enterprise. In many industries, benefits such as automated operations and advanced management software applications can have a direct impact on customer service, customer retention, product and service development, and can strengthen partner and supplier relationships.

Business Process Outsourcing for Business Transformation

Business process outsourcing illustrates the evolution of creating value through outsourcing. Consider the basic stack:

• There is a horizontal infrastructure layer including network access, desktops, etc. that is fairly similar from one company to another.
• On top of that are applications that are generally quite business-specific (these would vary dramatically from a construction firm to a provider of health care services, for example).
• Finally, there are business processes, and often these are not only industry-specific but also company-specific.

Historically, outsourcing started with the infrastructure layer. Firms were able to leverage size and scale and invest in automated processes to reduce costs. Application outsourcing followed closely behind, as firms were able to leverage resources for both development and support of enterprise-wide applications.

Next came outsourcing of standardized business processes for which the requirements were fairly consistent across firms and industries. One example is payroll processing and another is transaction processing for Finance and Accounting (F&A). An outsource partner may process F&A transactions the same way the business was already handling them (with a feed from existing systems and applications).

As outsourcing has become a mature and widely accepted strategy for operational improvements, many companies are beginning to consider the value of outsourcing for business transformation. The concept of business transformation--reaching for new levels of efficiency and company agility--aims at the highest aspects of the third level, the business processes that can truly drive innovation.

One example of the potential for business process outsourcing is F&A. In addition to processing transactions more efficiently, an outsource partner can also streamline the entire process to maximize cash flow, maximize inventory turn, and enhance reporting speed and capabilities.

The potential for business transformation based on supply chain outsourcing is another prime example. Once an enterprise has real-time, consolidated information about its supply chain, it can establish more strategic supplier relationships and lower the costs of procuring goods and services. Here, the right outsourcing partner can help by quickly and securely establishing direct links with both new and established vendors. This can bring greater speed and control into translating customer orders to shipped products.

While F&A and supply chain are good examples, outsourcing partners can also facilitate the process of business transformation by reviewing and fine-tuning processes in human resources, manufacturing, CRM, and the functions of nearly any business unit.

And, of course, it's not all about technology. An outsource partner will work with executives to provide business and process expertise, helping companies make the necessary changes to gain such advantages as managing risk, getting products to market faster, and enhancing customer service.

Here are a few examples:

• Managing risk
  Traditionally, companies invested in infrastructure to meet peak capacity demand. The problem was that some of this capacity was idle the majority of the time. With the right outsource partner, businesses can eliminate this unnecessary capital investment while still protecting against the risks of demand spikes. They can get the required capacity "on demand" from an outsourcer. Business process outsourcing can also help with other types of risk such as compliance: outsource partners can help with providing security, access, and auditability to information to help businesses successfully address regulatory mandates in any industry.
• Speed to market
  A good example of a business process that can be significantly enhanced by outsourcing is enabling overall business acceleration by getting products and services to market faster. Outsourcing offers an opportunity to speed every piece of the process from design to go-to-market. For example, an outsource partner can help:
  • Provide advanced collaboration tools for design teams to share in real time, even with virtual teams scattered worldwide.
  • Improve the quality of service by ensuring that IT is always "on" (providing worldwide access, availability, capacity, storage, and security).
  • Free up capital, people, and technology for core business functions (by outsourcing non-core activities).
• Enhancing customer service
  Many global businesses want their customers and partners to have the same quality experience no matter where they are. Some outsource partners have the global footprint to allow them to provide consistent services around the world to customers and supply chain vendors alike.

The Transformation Continuum

Most businesspeople are familiar with the continuum from data to information to analysis and finally, to recommendations. The question that has become a significant differentiator for businesses is how quickly they can move through this continuum.

Ultimately, outsourcing will be able to enhance executive decision-making--assisting at the highest levels as CXOs lead and direct business transformation. Some technology firms are working on solutions to link data and information from many separate systems and processes in ways that will provide analyses to help with the decisions that drive business performance at the CXO level.

Outsourcing has come a long way from the days of providing tactical support within the confines of IT. From improving business efficiency to process enhancements to business transformation, outsourcing today offers speed and quality advances enterprise-wide.

About the Author
Marc Schwarz leads HP's Managed Services organization, which provides strategic outsourcing services and solutions to manage both the technical components and the business aspects of an enterprise's IT infrastructure, applications and business processes. Previously, Schwarz spent 29 years at Deloitte Consulting where he held many leadership positions, including Global Director Outsourcing, where he led the firm's BPO and IT Outsourcing operations, both sales and delivery, and Chairman of Deloitte Consulting India Private Ltd. Schwarz is a Senior Member of the Institute of Industrial Engineering and a Certified Management Consultant.

Publish Date: October 2005

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