Businesses are in danger of losing control of their outsourced IT projects due to a lack of internal IT leadership, poor business sourcing strategies, inadequate relationship building and a failure to provide the right internal resources and skills. These are the main findings of a new study commissioned by the IT and business services company, LogicaCMG.
The new research-based white paper, ‘Building Core Retained Capabilities’, led by Leslie Willcocks, professor of technology, work and globalisation at the London School of Economics, reveals that senior managers must identify and retain key skills and core competencies in their in-house teams if they are to truly benefit from the relationship with their outsourcing supplier. The research shows that organisations are currently prioritising short term cost reductions over an ‘invest to save’ strategy, resulting in a number of outsourcing projects developing problems such as loss of control, inadequate service, and constant renegotiation due to a lack of strong internal leadership and project management.
As organisations outsource more and more to achieve strategic advantage (by 2012 about five per cent of the average corporation’s IT budget will be with outsourcing suppliers) it is crucial that they resource properly internally. The research identifies nine core capabilities that must be equally applied to ensure long term business performance and strategic advantage from IT and business outsourcing. These capabilities include leadership, business systems thinking, relationship building, architectural planning and design and informed buying, which lean towards softer business skills.
The consequences of failing to invest internally in these core competencies are sizeable and include high contract costs and poor pay offs, back sourcing and excessive management effort. Investment in these capabilities is expensive and with management costs of the contract value for the retained team expected to be at 10 to 12 per cent by 2010, organisations must ‘spend to save’ now, by investing in the right internal skills to develop long term strategic benefit.
The white paper concludes that to implement all nine core capabilities requires high performing individuals, who can develop into a high performance team with a greater emphasis on both business and interpersonal skills. However, the study reveals that in practice the recruitment and retention of individuals with these capabilities is confined to a small, high quality group, compounded further by the fact that current retained functions tend to possess strong technical expertise but are weaker on business and interpersonal skills. This results in a major human resources challenge and organisations need to be prepared to upskill and recruit to provide the right resources and support to create a successful in-house team.
Professor Willcocks, lead-author on the white paper, said: ‘In 15 years of research we have found that organisations are continually faced with a key challenge – what needs to be outsourced and what needs to be retained? We have found a link between the lack of investment in core in-house capabilities and the disconnect it creates between the outsourced function and the retained portion of the enterprise. Skills such as relationship management through senior management attention, contract, structure and refined capabilities can create a 20 to 40 percent difference on service, quality, cost and other performance indicators. If organisations are to benefit from outsourcing, a real change of focus is needed; from activities and assets to leadership, management and appropriate staffing.’
Martin Blackburn, Chief Executive Global Service Delivery at LogicaCMG commented: ‘While considerable attention has been devoted over recent years to the potential benefits of IT outsourcing, there has been little discussion of what kind of retained team organisations require to manage their outsourcing supplier. The report highlights that all too often organisations under-invest in building core capabilities due to cost. The result is that they miss the chance to pre-empt problems by not having a workforce with the capability to perform at the levels needed to maximise both success and achieve an optimal cost-effective outsourcing arrangement.
‘Core retained capabilities enable organisations to achieve governance, control and flexibility in outsourcing arrangements, whilst mitigating against risk – a tried and tested way for organisations to keep control of their IT future.’
In addition to assessing the current IT outsourcing landscape, the paper makes some key predictions for the outsourcing market in the future, especially in the areas of global sourcing, supplier strategies and client developments. Key predictions include the rise in BPO activity overtaking ITO and the increased prevalence of nearshoring.