Outsourcing comes home

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“Outsourcing is undergoing a rapid metamorphosis.” Kiran Bhagwanani, senior vice president, India and Middle East, HCL Technologies

With the changing business demographics, the competitive benefits of outsourcing are shifting from just cost benefits to exponential value creation for the client. Kiran Bhagwanani, senior vice president of HCL Technologies explains how.

Today, organisations are increasingly inclined towards absorbing greater value and benefits out of every sourcing relationship. However many IT outsourcing service providers continue to approach such relationships through a tunnel vision of traditional formats, structures and sourcing models while clients have started to look at IT outsourcing as a collaborative and business aligned intervention.

In a downturn economy especially, companies are struggling with declining top lines and rising operating costs as economies of volume shrink, forcing them to innovate their business models and redefine their operational paradigms.

In this context, companies are clearly looking at leveraging IT strategies for creating the flexible, scalable and responsive systems and processes that businesses demand.

One of the evolving IT sourcing strategies that is oriented towards such business transformation is the Total IT Outsourcing (TOS) strategy. TOS includes a complete handover of an organisation’s IT function to the vendor, except for some core functions that are retained in-house.

Model evolution
Traditional TOS

Traditionally, total outsourcing contracts meant the clients followed a ‘lock-stock-barrel’ approach and outsourced their complete IT function including assets, strategy formulation, architecture and operations.

While this approach addressed some of the clients’ key pain areas giving them access to the service providers’ expert skill sets, industry best practices/processes and their global services delivery capability, issues such as loss of strategic control, lack of transparency, static contracts with inflexible SLAs left a lot to be desired in the outsourcing engagement.

ITO has matured and sourcing strategies are transforming based on changing client needs. The Traditional Total IT Outsourcing strategy described above is undergoing rapid metamorphosis.

This transformation is being driven by the changing role of a CIO into an internal service provider for the entire organisation and IT is no longer being viewed as a cost to be minimised but an asset to be business aligned.

Three forces in particular are changing the face of what we call the ‘Traditional TOS’ model:

Force 1: Need for increased flexibility and control

Increasing fluidity in the world markets are forcing companies to create entire business models based on dynamic structures and IT cannot be outside this circle.

Flexibility and control of strategy and investment decisions has to lie in the hands of the CIOs today to be able to down-size/up-size it based on changing market scenarios. Traditional TOS gives little space in these areas and therefore is losing its stickiness.

Force 2: Need for more transformation benefits

While some of the vital performance indicators, such as cost benefits, quality and productivity are still important in assessing the value benefits of IT outsourcing, from a CIO’s perspective there is stronger emphasis on deriving greater transformational benefits rather than just cost advantage.

Force 3: Changing dynamics of asset ownership in ITO deals

Ownership of IT assets is one of the most important factors in determining the dynamics of an outsourcing engagement. Historically, Traditional TOS Suppliers leveraged assets ownership transfer in ITO engagements to deliver financial and operational benefits to the buyer.

However, key changes in the market reversed this dependence, resulting in increased exploration of the “asset-light” outsourcing model. Several related factors drove the increase in adoption of the asset-light model.

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