IT Outsourcing: Merely Efficient or Truly Effective?

The challenge is to deliver both simultaneously. However, being good at one of the requirements makes it difficult to be credible in delivering the other. Which of these requirements is in the ascendancy in the IT outsourcing market?

IT that is run efficiently is typically purchased by CIOs that have solid experience of technology and have spent most of their career working in the IT department. They diligently track new technology developments and will probably be very opinionated on the impact of, for example, open source on the IT industry. Such individuals excel in negotiating the lowest cost deals with service providers. However, the organisation beyond the IT department is only aware of them when things go wrong, or when there is a big system rollout.

The vast majority of CIOs will recognise themselves as such efficient purchasers and managers of IT services, and selling to this type of customer is reasonably straightforward as the deal is all to do with cost, best practices and technical outcomes.

Buying and selling effective IT services

IT that is run effectively in the 21st century requires different but complementary skills to those required for efficient IT services. The effective CIO is a different type of person from the efficient CIO and is far rarer today. This type of individual is more interested in developing a management career within the organisation or sector. For this reason IT is unlikely to be the sole department in which this type of CIO has worked, and the individual's development focus will be on achieving broader business goals, and gaining experience implementing and managing change programmes. Such an individual will actively network beyond the IT department. Selling to this type of customer is more complicated and generates deals geared towards delivering business outcomes that could only be achieved with technical innovation.

What does this all mean for IT outsourcing?

In the market for IT outsourcing (ITO) approximately 90% of deals could be categorised as efficient, with 10% as effective. Despite the best efforts of supply-side marketing teams that focus on the effective CIO agenda, it is the efficient CIO agenda that dominates, and this has interesting implications for the IT outsourcing market.

• Efficiency loves methodology and, consequently, such CIOs will continue to lean heavily on the third-party advisor market for sourcing support, as the advisors themselves are exemplary bastions of efficiency.
  
• Efficiency loves technical metrics and technical benchmarking services.
  
• Efficiency feels very comfortable with demonstrable best practices - industry sector 'best practice' for IT is the closest the efficient CIO will come to a business outcome.

While the effective CIO agenda places an emphasis on business value and competitive differentiation via innovative use of technology, the efficient CIO is not looking in this direction. We will return to the effective CIO agenda at a future point, but in the meantime the IT outsourcing market remains a market defined by the requirements of the efficient CIO, and those requirements are consolidation and cost containment. The efficient CIO wants to understand exactly how the external service will be delivered and will want to maintain control over all, or most, technology choices.

What is the efficient CIO looking for in ITO?

The efficient CIO is an operational expert with strong technical competency and a disposition for metric evaluation. The key reasons such CIOs outsource IT are as follows.

• The main consideration of an efficient CIO is to bring cost savings to bear on the IT budget as quickly as possible. Service providers can achieve this more quickly than most internal IT departments because they typically have more data centre consolidation experience than any single customer organisation, and they can apply economies of scale that many customer organisations cannot.
  
  
• An efficient CIO likes to manage via service-level agreements (SLAs) and, in most organisations, external service provision (eventually) brings better service improvement compared to internal service capability. This is because service providers are financially motivated or penalised by SLA performance in a way that is hard to reproduce with a captive, internal IT department.
  
  
• Efficient CIOs welcome access to skilled IT resources. The examples that stand out when talking to CIOs are where service providers can use their partnerships with technology companies such as Microsoft and Cisco to bring in their technical experts where necessary. Very few customer organisations would be able to do this.
  
  
• The efficient CIO most clearly sees the benefit of using an external service provider when it comes to security breaches, viral atta cks and disaster recovery. In most IT infrastructure service contracts we discussed with CIOs, it was in times of pressure such as this where the external service provider was seen to have excelled itself.
  
  
• Efficient CIOs also welcome the ability of an external service provider to apply and enforce standards for servers, networks, management & monitoring tools and storage. These are the very standards that they have often been struggling to enforce alone for some time.

Supply-side marketing departments seem to have reached a consensus that 2006 is the year of innovation in IT services. Whether this term will really resonate in today's IT outsourcing market is questionable. Maybe 2006 will be the year when some CIOs begin to question whether efficiency as defined over the past few years of technology slump is equally relevant as market conditions change. However, given that flat IT budgets remain in most sectors, we doubt it.