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The Secret to Successful Outsourcing
Outsourcing solutions are evolving toward integrated business and technology solutions; competitive differentiation will center on vertical expertise and alignment.
Posted Jan 19, 2004
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META Group's most recent report on the leading outsourcing vendors in North America shows that outsourcing solutions are evolving toward integrated business and technology solutions, and that competitive differentiation will center on vertical expertise and alignment. According to the report, the top outsourcing vendors provide a range of commodity infrastructure services: application configuration, development, and maintenance; integration with business services; and management consulting to pull together disparate technology and business services. "Purchasers of outsourcing will increasingly become combined task forces of business and technology personnel. Vendors must streamline technology offerings and shift sales organizations to sell and maintain credibility with both business and technology professionals," says Dean Davison, vice president with Meta Group's Technology Research Services and lead author of the report. "Because technology is both an enabler and a cost against business operations, optimal use of IT will increasingly impact business results. Failure to leverage technology will become a competitive disadvantage." The study, "Top IT Outsourcing Vendors: North American METAspectrum," which evaluates 15 vendors in the outsourcing space, finds that brand value and market reputation are greater contributors to success than solution delivery. Although some vendors target specific vertical markets or geographical locations, others service only small/medium enterprises. The report states that over the next five years successful vendors will have to develop price-competitive infrastructure solutions, global resource delivery, vertical market depth and specialization, integrated solutions, the ability to be an integrator of services, and the ability to cost-effectively sell models that reach small and midsize enterprises. Another recently released META Group study shows that offshore outsourcing cost-savings perceptions differ from realities. The number one risk for stateside executives is the perception of actual savings yielded by outsourcing offshore. IT organizations often assume that labor arbitrage will yield savings similar to a person-to-person comparison (for example: a full-time equivalent in India will cost 40 percent less), without regard for the hidden costs and differences in operating models. The reality is a general savings of 15 percent to 20 percent during the first year.
As the current offshore outsourcing movement prepares to grow between 20 percent to 25 percent in the next two years despite initial resistance and geopolitical concerns, key decision-makers should consider a series of risk factors before sending projects/functions overseas. These risks include security breaches, changes in project costs, and the cost and effectiveness of cultural education programs. In addition, META Group urges executives to consider putting a contingency plan in place in case the vendor fails to deliver. "A common oversight for IT organizations is a contingency plan. What happens if the vendor, all best intentions and contracts aside, simply fails to deliver? Though this scenario may be unlikely, the IT organization must assess the implications of vendor failure," Davison says. "High risk or exposure might deter the organization from outsourcing, it might shift the outsourcing strategy, or it might drive the company toward outsourcing. The results of risk analysis vary among companies; it is the process of risk analysis that is paramount."
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