In choosing the right model for outsourcing, consider three factors

In choosing the right outsourcing model, enterprises need to consider differentiating, "who cares?" and parity factors.

The older and more bitter I become, the more it seems to me that much of my success as an IT leader depends on

my being able to pick the right battles, and then win them. 

It's nearly impossible for me to do everything that the CIO role requires. That means I have to be selective about what I take on and where I focus my team's efforts. 

Done correctly, outsourcing will help me pick the right battles and win them. Done poorly, outsourcing will be a battle that I will always lose. Given the importance of outsourcing as an IT strategy, how can we do it correctly?

I've tried out a number of types of outsourcing, with mixed results. About 10 years ago, I developed a decision making model that pretty much guarantees that I'll pick and win the right battles and make correct decisions about what to outsource. That model looks like this:

Market
differentiation
High Partner Differentiating
Low
Who cares
Parity
  Low High
 
Mission-critical

We create competitive advantage if we do so-called differentiating activities better than anyone else in our market. These activities define our market focus: As we perform them better than anyone else, we win new customers and grow.

There are other activities that are mission-critical -- and therefore incredibly important -- but won't create competitive advantage for us. We have to do these well, but there's no reason to think of or try to find ways to perform them better than anyone else. Rather, we should do these activities in a parity way.

Hopefully, we aren't spending too much time or effort on activities, projects or processes that neither differentiate us in the market nor are mission-critical. In our outsourcing model, these are called "who cares?" activities.

Finally, there might be some things that aren't mission-critical but that do create competitive advantage. For these, we partner (the final category in our model) with another company.

How does this outsourcing model help ensure success?

Outsourcing model: Differentiating, 'who cares?' and parity factors

First, we should never outsource any process, project, feature or function that belongs in our differentiating category. We must be the masters of these activities. In addition, if we turn these over to someone else, it is unlikely that we'll create and maintain market leadership over time.

We create competitive advantage if we do the 'differentiating' things better than anyone else in our market.

On the other hand, we should actively pursue outsourcing those tasks in the "who cares?" category. And we even shouldn't care too much how well the outsourcers perform -- as long as they can do it inexpensively. This stuff needs to be done, but quality is secondary to cost.

Finally, there's the outsourcing that we can use to pick and win our battles -- the outsourcing of parity activities. Decisions about outsourcing this category of work, however, are more nuanced than decisions about tasks in the differentiating and "who cares?" categories.

Parity activities are mission-critical, and therefore incredibly important. So, my first rule is that I will outsource such activities only to a provider for whom these activities are differentiating. The last thing I can afford to do is to outsource a mission-critical activity to a provider that isn't a market leader. If my chosen provider is a "market laggard," I create a natural gap between parity and my performance. Parity gaps kill my IT and leadership credibility.

My second rule for outsourcing parity processes is that I will do so to fill any gaps between my current performance and parity performance. For me, for example, network performance is a parity activity. Yes, our network is mission-critical and important. However, we don't create competitive advantage with superior network performance. Now, suppose I have a problem maintaining acceptable network performance. I can either develop mission-critical network management capabilities internally, or I can outsource network management to someone who excels at network management. Outsourcing might be the fastest, simplest way to fill this parity gap.

My third rule for outsourcing parity processes is that I will do so to change my IT focus. It is pretty common that most of our IT resources are allocated to maintaining legacy systems. This means there's little left over to work on new projects, differentiating projects and innovation. But I can change this maintenance-to-innovation ratio by letting someone else -- someone for whom such work is differentiating -- do the legacy maintenance work.

A few years ago, I got entirely out of the business of maintaining our ERP system. (ERP is a prime example of a parity system: We didn't win customers because we had the world's greatest accounting and inventory management system.) This freed up about 50% of my development staff to work on new projects -- projects that linked directly to the business creating competitive advantage.

There it is: a simple, yet nuanced way to pick and win the right outsourcing battles -- the ones that will enable strategy and improve our operational excellence.

Niel Nickolaisen is CIO at Western Governors University in Salt Lake City. He is a frequent speaker, presenter and writer on IT's dual role enabling strategy and delivering operational excellence. Write to him at nnick@wgu.edu.

This was first published in March 2012

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