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PwC study: Majority of top executives bullish on outsourcing

Linda Tucci, Executive Editor

If you know that outsourcing and alternate sourcing arrangements are on the mind of your CEO, it is good to be proactive and have a sourcing strategy well thought out before one gets imposed on you.

The PwC survey found that a majority of senior executives -- 87% -- think IT outsourcing delivers on the business benefits projected in their original plan. Even more, 91%, say they will outsource again, whether totally happy with the results or not, because outsourcing has become "such an essential business practice."

The endorsement comes despite a "frequent disconnect" between the expectations of the executives and those of their service providers, according to the findings. For example, the study found that 52% of service providers recommend outsourcing to offshore locations, while only 20% of companies believe this works best in "real-life" outsourcing.

Service providers point to employee opposition as a barrier to outsourcing, but two-thirds of customers don't see it that way. In addition, 25% of senior executives say that using many suppliers and providers works better than using a few, but, not surprisingly, only 10% of providers think so.

Core business

For Damian Smith, general manager - digital media with Network Ten, the importance of outsourcing has become all too clear since network volumes began soaring with the introduction of online videos several months ago.

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Ten been trying to scale its own infrastructure to keep up with this growth, the company's IT division - which Smith oversees - would have run into major problems. Outsourcing this function, to hosting giant Hostworks in a $2.5 million deal signed late last year, reflects Smith's belief that outsourcing is essential for companies keen on keeping to their core competencies.

"If you sat down to do the sums you might think outsourcing is marginally more expensive," he explains. "But you could never conclude that operational complexity shows up on the balance sheet. The scale required to do interesting technological things has changed, and this comes with a price and a trade-off. More and more corporations who aren't technology centric, but for whom technology is an absolutely vital enabler of the business, are going to be thinking of this approach."

The fact that the infrastructure has quickly scaled to support the increasing popularity of Ten's online video confirms the suitability of the outsourcing approach. Over the next 24 months, the network plans to launch at least 50 online video channels; Smith hopes to strike even more relationships with outsourcers as Ten's fledgling online presence continues to expand.

"We want to be able to bring in a large number of applications from a large number of providers," he explains. "We would like literally dozens of providers working with us to provide different parts of our consumer facing applications infrastructure."

The strong response from senior executives should put to rest any notions that IT outsourcing is on the wane: in Australia alone, IDC recently noted that $7 billion in outsourcing contracts would be up for renewal this year - offering best-of-breed providers, in particular, considerable opportunities as large contracts are split into more appropriate functional divisions.

"There have been other reports published recently that have indicated IT outsourcing is finished and companies are moving on to something else," said Robert Scott, who leads PwC's IT global network. "Clearly, our experience in the field is that IT outsourcing is definitely a mature industry, but it continues to grow and is extending to other areas, such as research and development and engineering services."

There have been inklings that the appetite for outsourcing, at least among the largest companies, might be diminishing. Global outsourcing expert Technology Partners International Inc. (TPI) reported last month that outsourcing contract awards for the first quarter represent the lowest number of contracts signed in the past 10 quarters. That news came on the heels of a report from U.K. law firm Addleshaw Goddard LLP that 60% of FTSE 350 companies changed or renegotiated their IT outsourcing contract, while a third opted to return the running of their IT infrastructures to internal employees.

But Gartner analyst Lorrie Scardino said this is probably a blip, and the level of outsourcing will continue to go in one direction: up. "In the time I have been with Gartner, which is seven years, there hasn't been a retraction in the amount of outsourcing," Scardino said, adding that warnings about the death of outsourcing tend to come in waves.

"Gartner was very firm in telling clients not to get fooled, because there was no indication that the trend was down," said Scardino, who oversees sourcing research for the global consultancy.

Gartner has found that insourcing some work is the norm when companies rebalance the portfolio of tasks they have outsourced, especially after seeing what works and doesn't. A change in leadership can also result in work being brought back or sent out, depending on the bias, Scardino said.

Indeed, she said, any study about attitudes toward outsourcing should segment its research into "first-, second- and third-generation" outsourcers, because expectations and results change dramatically as companies become more experienced.

The PwC study is based on responses from 226 senior executives in private-sector corporations worldwide and 66 outsourcing providers. Fifty-one percent of the executives worked in firms with revenue greater than $1 billion, including 16% with revenue exceeding $10 billion. The 66 service providers were mainly from the United States, China, India and the U.K.

IT services remain the most widely outsourced activity, reported by 57% of those surveyed. But, overall, 70% of respondents said they outsource one or more "strategic activities," including the production or delivery of core products (53%), sales and marketing (33%) and research and development (32%).

Go-to guy

So, what are the implications of the PwC study for CIOs? Well, that depends.

As outsourcing expands to other areas, CIOs may be tapped for their expertise by companies, PwC's Scott said.

"We see that in the work that we do in the field, where CIOs maybe have now five or 10 years of outsourcing experience. As the organisation looks to outsource other functions, the CIO is playing an active role in the outsourcing strategy of the firm," Scott said. "They are being solicited for their lessons learned."

That's the positive news.

The caution is that because IT outsourcing is a mature industry, your boss may assume that it is easy to do, Scott said. Instead, the survey reports that all steps in the outsourcing lifecycle -- from making the business case to structuring, managing and renewing the deal -- have challenges associated with them. "It is a lot of hard work."

Gartner's Scardino agrees that CIOs can be leaders in business outsourcing, but only if IT handled outsourcing well. "If they did it badly and apply that approach to the business, the outsourced work is much more visible in the business," she said -- and the difference in quality between in-house and outsourced work is that much more glaring.

Two trends CIOs need to be aware of are the move from single-contract/single-vendor outsourcing to multivendor outsourcing, and the wariness with which CEOs continue to view global offshoring, Scott said.

Using a single service provider is not about to disappear: 39% plan to increase their use of this approach. But other models have the momentum: 50% of the firms surveyed expect to increase multisourcing and 45% to increase their use of joint ventures.

The findings are compatible with findings from Gartner on the recent trend of using multiple, specialised providers. The 2006 annual review from TPI found that as more service providers are competing for and winning contracts, the annual share of the Big Six providers has steadily declined since 2002.

The challenge in using multiple vendors is getting them to work collaboratively in the best interests of the company, Scott said. "This is an issue that some leading CIOs are facing now, and others will have to learn how to do that."

Good communication skills are critical to closing the gap.

"If I am a CIO I am going to be looking very hard at my service management function," Scott said. "'How do I make sure that my requests, which might be defined in my business terms, get translated accurately to my various service providers, so they know what I am talking about and the expectations I have.' It is very much a relationship issue."

Mainly, CIOs should be prepared, Scott said. "If you know that outsourcing and alternate sourcing arrangements are on the mind of your CEO, it is good to be proactive and have a sourcing strategy well thought out before one gets imposed on you."

PwC does not view outsourcing as the death knell of the IT shop. Running an IT shop is complex, and sometimes having partners to run that IT shop helps the business, Scott said. Apple, for example, designs the iPod in its US offices but outsources manufacturing to Chinese firms, not only because they can build it cheaply but also because of their expertise in materials science and packaging technology.

"I don't think that the growth in outsourcing diminishes the role of the CIO. It can free up the CIO to be more strategic, to have more time available to work with the business, and to gain access to a much broader range of skills and resources," Scott said.