Outsourcing might be the answer but whats the question?

This article is brought to you by Retail Technology Review: Outsourcing might be the answer but whats the question?.

Outsourcing is about taking something that isnt your organisations core competence and getting a specialist to run it more efficiently.  The essence is to try to take advantage of a specialist providers knowledge and economies of scale to improve performance and achieve the service you need, usually at a lower cost.

In reality there are many reasons why organisations decide to outsource, and more often than not its a question of cost.  However, there can be other drivers.  A common mistake is to outsource something thats perceived to be broken in the hope that the outsourcer will be able to fix it.  Frequently all that happens is that you merely shift the same problem to somewhere else.   The problem doesnt get fixed at all, it simply takes on a slightly different flavour.

As with many things in life, it all boils down to knowing exactly what you want to do and why you want to do it.  In the case of outsourcing decisions, the critical thing is to understand at the outset exactly what the outsourced service needs to provide to your organisation, and how this provision will need to evolve over time.  And just as importantly, you need to know how to communicate these needs clearly to prospective service providers.

The importance of this cannot be overstated.  If you dont know what your business needs from its outsourced services then you have no rational basis for selecting the most appropriate provider.  Neither will you know how to measure their true performance.  In reality this can be a difficult, multi-faceted question to answer.  In many cases organisations fall back on one-dimensional considerations of cost rather than understanding the real business value of whats on offer.  This is particularly true in the current economic climate where the pressure for immediate cost reduction can be irresistible.

Dont get me wrong.  Cost is important.  It is and will remain a key driver for improvement through outsourcing.  But using outsourcing as a means of cost reduction without an eye to the longer term needs of the business can be seriously self-defeating.  To make outsourcing more than just a short-term cost-based band-aid, you need to place it within the context of a wider plan for change and improvement of your IT service provision.  The decision whether or not to outsource IT services should be one element in a wider integrated transformation vision that is designed from the outset to move your business to a healthier place.

That sounds fine - its the kind of thing that consultants always tell you.  But in raw practical terms what does it mean?   What questions do you need to ask and what actions do you need to take to turn a complex problem into a practical, rational solution?

The starting place should be a clear view of what the in-house IT function, or existing service provider, is giving to the business, and what the business perceives is missing or could be improved.  This should not be expressed solely in terms of the traditional performance metrics of the kind that appear in SLAs.  These rarely measure the true capability of IT service provision, and that is precisely what were after here.  You need to look at broader business-based metrics, including the ability of the services to change to reflect the evolving needs of a volatile business environment.

Analysis work of this kind often exposes some important and illuminating gaps between what the IT function perceives theyre providing and what the business thinks its receiving.  You may well find that there is a fundamental mismatch of language and mindset.  It also forces everyone, IT and business alike, to talk to each other and to introduce clarity into the conversation.  Most importantly, it can lead to significant re-assessment of what should be delivered, highlighting areas for improvement in the current service portfolio, and pinpointing where savings could be made through eradication of activities that are surplus to requirements.

The second step is to understand what the business requires of its IT service provision in order to be successful in the future.  Again, this isnt a trivial question and the answer should not be expressed solely in terms of familiar performance metrics which will provide too one-dimensional a view.  You need to understand and characterise the service capabilities that will support the changes, opportunities and constraints you know your business will have to face moving forward.

Once youve completed these steps, youll be in an excellent position to make rational outsourcing judgements, but the exercise may look daunting.  This is a reasonable reaction because the truth is it is.  There will be a great deal of data to assimilate, gathered both from outside and from within your own organisation.  There is no shortage of such data, but the problem is how to force it all into a coherent shape that all stake holders can understand and act on.

The best way to do this is to simplify the problem.  Business and IT leaders within the organisation should collaborate to create a model of the business that spells out, in clear common language, the relationship between the key value-generating business processes and the IT services that support them.  This is easier than it sounds.  The model itself will consist of a relatively small set of strategic measures things that are important for you to know about the behaviour and capabilities of your IT services and business processes.  You may already be measuring some of them as part of your regular management information activities.

Once you have agreed these measures, the important next step is to define how they are related, so projected changes in business behaviour can predict corresponding changes in IT service requirements.  The model does not need to be complex or completely comprehensive less than a dozen measures will do.  It just needs to be detailed enough to point you in the right direction.  And the model can be changed over time to reflect your changing business circumstances.

Such practical working models are not common in businesses right now, but they should be.  Armed in this way, youll not only be able to specify whether outsourcing is the answer, youll also be able to specify the question.