Gartner: Good old-fashioned outsourcing has got to stop!

Ad hoc, compulsive outsourcing needs to give way to disciplined multisourcing. How? For starters, ask the right questions in the right order.

ORLANDO, Fla. -- Companies need to stop outsourcing information technology the way they do today or face serious business disruption. That was the message from Gartner Inc. analyst Linda Cohen, who kicked off the Gartner Outsourcing Summit 2006 Monday.

It is hard to give up a competency.

The compulsive, ad hoc and fundamentally tactical approach to outsourcing practiced by most companies will be unsustainable by 2010, Cohen said, in part because companies will be doing more outsourcing with more suppliers. Organizations tend to outsource to solve a short-term problem, Cohen said. Unless organizations practice what Stamford, Conn.-based Gartner calls a "disciplined multisourcing" strategy, their ability to grow and their profitability will erode.

"Most of you know you're stuck in good, old-fashioned outsourcing, and you know you need to kick it up a notch," Cohen told a packed room.

The first step to reform is asking the right questions in the right order, Cohen said. Most companies begin the decision to outsource by asking who is out there, when the question that needs to be addressed head-on is why the organization is contemplating changing the way it delivers IT. That query should be followed by asking what, who, how and finally where, she said.

Why, what, who, how and where

Companies basically have three reasons to outsource IT: to cut costs (efficiency), improve business operations (enhancement) or change business performance (transformation). Cohen said it's important that top executives agree on why the organization is outsourcing a particular function. If the CFO believes the reason is to save money and the CIO is convinced it's to enhance operations, while the CEO is looking to change business performance, "Stop until you have consensus," she said.

Knowing what to outsource means knowing which IT functions are core to the business and assessing how well you deliver them. IT services that are strategic to the business and that the company excels at are its "sweet spot," Cohen said, adding that everything else warrants a hard, cold look.

Her advice? If a service is strategic to the business and difficult to do internally, give it up. If the process is not strategic and you're no good at it, give it up. If you discover things that you are really good at but are not strategic business, the question you should be asking is why you're still good at it, said Cohen. "That's why this is hard to do objectively. It is hard to give up a competency."

Companies that have developed talent in a particular area might consider spinning off that competency, as DuPont did with its SAP expertise when it decided the level of competency it had achieved was no longer strategic, Cohen said. "They decided to outsource it but knew they had precious talent for sale." Finally, if you uncover strategic services that you're not good at, "you'd better get good quickly," she said.

The "how" of outsourcing boils down to two modes: highly customized and pricey or highly standardized and cheaper. In either case, Cohen said, companies need to set up a governing sourcing model. This model should be tuned to your company's personality, she said, but might best be thought of as having "three buckets": guidelines for setting the rules and deciding what's in and what's out; coordination of how the internal and external IT providers will work together; and an evaluation method that measures the performance of internal and all external providers in the same way and against the company's business goals. Good governance will allow you to build partnerships with vendors and avoid the finger-pointing that can derail outsourced work.

A word of caution: Cohen advises that you not put the internal expert of an outsourced function in charge of managing the vendor. Your expert will invariably spend a lot of time making comparisons to how it was done in the past, she said, and how it was done is no longer relevant in a disciplined approach to outsourcing. The point highlighted another reality companies need to face head-on, namely that outsourcing is a "passionate and political decision," said Cohen, and companies shouldn't pretend it isn't.

Indeed, judging by the reluctance of several attendees cornered after the presentation to attach a name to their comments, outsourcing remains a sensitive topic. But the talk seemed to resonate, particularly the parts about the ad hoc nature of most outsourcing decisions today. An IT executive from Ohio-based Cardinal Health said he liked Cohen's three whys of outsourcing, as a useful way to start the decision-making process. An attendee from Wells Fargo said the tendency to act first and figure out why later was typical. "That would be us," he said.

Let us know what you think about the story; email Linda Tucci, Senior News Writer.

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