Business Mentor: Make Strategic Sourcing Work for Your Business

With IT staffing costs soaring -- they now represent anywhere from 55% to 63% of IT budgets -- companies of all sizes are looking hard at sourcing strategies to get the most for their money and meet increasing business demands. This is especially true for fast-growing midsized companies, which rely even more heavily on the skills of outside partners and suppliers.

When I say sourcing, I don't mean outsourcing in the traditional sense. I'm talking about opportunities to selectively source IT in ways that let you strike the right balance between increasing performance, reducing costs and -- most importantly -- staying in control of your IT destiny.

There are two types of strategic sourcing I've employed that especially impressed me with their ability to boost IT flexibility and respond swiftly to business requirements. They are managed services and recruitment process outsourcing.

Using managed services means selectively outsourcing technical or telecommunications functions, bringing in expertise from external partners on a pay-as-you-go basis. This approach eliminates up-front capital spending and reduces the need for incremental staff. It allows your internal IT people to refocus their efforts. Rather than concentrating mainly on managing infrastructure, they can support new business applications.

Enabling a Top-Line Role

For example, I am currently working with sourcing vendors that provide such services for a consumer electronics retailer and a midsized insurance company. The electronics retailer has successfully implemented a model that displaced six IT staffers who had been focused on infrastructure management and monitoring of IBM DB2 systems. Those staffers were reassigned to areas more directly beneficial to business goals: supporting store expansion, improving online availability and sharpening inventory control for 650 locations nationwide. The cost for six incremental staff to pursue these other goals would be in the range of $575,000 to $700,000 annually, depending on skill sets and experience.

The insurance company realized a $1.5 million reduction in telecom expenses by re-negotiating a contract to reduce annual costs, and by retroactively clawing back overpayments for the previous two years. Its service provider completed the analysis and the negotiation.

Recruitment process outsourcing uses third-party providers to recruit contract labor. It's a much faster way to fill vacancies, and it can improve the caliber of candidates since it draws on a wider talent base. It allows companies to co-manage and control contract pricing through total vendor margin disclosure, which means your supplier shares information with you about its costs for the resources and their markup.

A benefit of this sourcing option is its ability to transfer ownership to the in-house organization, allowing a company to own the knowledge, pricing and decision-making. I have used this approach and reduced hourly billing rates by 39% to 45%, for an average savings of $35,000 per contractor per year. This isn't a favorite strategy for sourcing vendors, however, because they have to fully disclose their cost information and margins. If they won't, find someone who will.

These sourcing strategies can accomplish several key goals in increasing IT flexibility and optimizing performance.

Selective sourcing to meet your business demands is a powerful alternative that you shouldn't ignore. Break the legacy thinking syndrome and give it a try.

Jerry McElhatton, CEO of Virtual Resources in Dallas, is the former president of Global Technology and Operations at MasterCard International.

This was first published in April 2005

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