Benefits of outsourcing go beyond pricing

Companies are looking beyond low-cost options when evaluating the many benefits of outsourcing. As the outsourcing market becomes more price competitive, business value and governance become the top drivers for IT outsourcing.

Cost is no longer one of the top benefits of outsourcing for CIOs. Many companies are now looking at strategic value and speed to market as the primary benefits of outsourcing.

One case in point is Wilton Re, the Wilton, Conn.-based reinsurance company. Wilton Re has two IT departments: the strategic one and the nonstrategic one. The strategic department consists of CIO Andy Wood and two IT employees who handle the life reinsurance company's business processes, business analysis, information analysis and project, program and relationship management.

So what about the nuts-and-bolts operation of the IT department, everything from servers and storage to Voice over Internet Protocol and the help desk? Everything IT that the company doesn't consider a core competency has been outsourced to Bloomfield Hills, Mich.-based Logicalis Inc. since 2004.

"We started with a clean sheet, with a decision whether to build or buy things," Wood said. "I started out with the premise that IT wasn't a strategic advantage over reinsurance companies or any other company."

Outsourcing allows the internal IT department to focus its energies on high-potential projects that have strategic importance to Wilton Re. As Wood outlines the reasons and benefits of outsourcing, price doesn't come up in the conversation. Instead, Wood points to speed to market, the ability to manage cost and risk, a long-term strategic decision to take this route and a high degree of process as reasons for picking Logicalis.

"We're a small company with a big-company IT infrastructure," Wood said. "We've doubled our services with them since our inception. We believe it means a price break to them, and they pass some of that along to us."

Outsourcing considerations -- beyond price

Because infrastructure costs have dropped, companies with international operations may want to continue to handle their own IT functions. Factors to consider include location, delivery capabilities now and five years out, operational costs, value proposition to the business, value proposition to potential employees in the new location and a company's strategic objectives.

Although price remains an important issue when considering IT outsourcing, capability and value are terms heard more frequently from companies looking at the benefits of outsourcing, said Harry Wallaesa, president and CEO at The W Group, a technology management consulting firm based in Malvern, Pa.

Wallaesa said companies exploring outsourcing should ask three questions: What work needs to be done? Who should do it? Where should the work be done? "If you just ask about the possibility of offshore outsourcing, you're only addressing one of the three questions," Wallaesa said. "You need to ask all three."

Understanding what work needs to be done requires insight into the alignment between IT and the business. The question of who should do the work addresses issues of a company's core competencies, its value proposition against competitors and whether the work is customer-facing. Only after answering the first two questions can a determination be made of where the work should be done.

The difference between cheap and inexpensive

"Ninety percent of offshore work is fairly commoditized, seeking the lowest level of labor cost," Wallaesa said. "But there is a difference between cheap and inexpensive."

In a call center environment, for example, determining whether the cost difference between simply answering the phone and providing customer support is worth it is a question the company must answer beforehand, outlining its expectations in a comprehensive and well-syndicated contract, said Todd Furniss, chief operating officer at Everest Group in Dallas. The process shouldn't be adversarial, and any contract should reflect expected performance levels and governance issues such as how to handle disagreements and fix potential problems.

Governance key to outsourcing success

"Day-to-day governance, that's the hard work," Wallaesa agreed. "The biggest predictor of success in an outsourcing contract is whether or not they are governed. Too many CIOs abdicate the management of outsourcing."

Wood said he considers Logicalis Wilton Re's partner, adding he chose the company both for its range of offerings and its size. "You pick too small a company, you take too much risk," Wood said. "Pick too big a company, and you get lost in the shuffle."

Weekly phone calls and twice-a-year in-person meetings allow Wood to manage the relationship with Logicalis and the two application suppliers with which the company has also partnered. After nearly three years in an outsourced relationship, Wood said he can't imagine handling the IT function internally.

"I know the true cost of the work that's getting done, and I get to plug into all of these people to tap into their expertise," Wood says. "How can it get any better?"

Matt Bolch is a freelance writer based out of Atlanta. He can be reached at mbolch@mindspring.com.
 

This was first published in May 2007
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