"IF YOU REALLY WANT TO CUT COSTS, THE LAST THING YOU SHOULD DO IS CONCENTRATE ON CUTTING COSTS…" and other unexpected outcomes of a new kind of outsourcing.

Most early IT outsourcing deals didn’t last beyond the first contract. Even though their stringent cost-cutting objectives had been met and all the SLAs adhered to, 7 out of 10 businesses changed suppliers at contract renewal.

Why? Because first-generation outsourcing doesn't work any more. Unless all you want is more cost reduction, in which case you do the same thing again, but in India or China. However there is a solution in second generation Outsourcing which wil look at in greater detail further on.

Outsourcing that concentrates solely on cost is fine if you think IT can never add value, or if you believe in keeping different parts of your business separate, so they can’t collaborate in support of your strategies. But if you want every piece of your operation to have the same objective (adding customer value is a good one to start with) and be free to innovate and collaborate to achieve it, then banishing IT to some fixedprice, fixed-term limbo is no longer smart. In fact it’s dumb, which is why first-generation outsourcing is now sometimes referred to as dumb-sourcing.

So is there such a thing as secondgeneration outsourcing? Yes there is – let’s call it smart-sourcing.

SMART-SOURCING. MORE COSTS LESS

Put simply, smart-sourcing is outsourcing that gives priority to adding value over cutting cost. As it happens, one remarkable secondary effect of adding value can be cost reduction – often bigger and better reductions than cost-focused contracts achieve alone.

A SOURCE OF ADDED VALUE ACROSS THE BUSINESS

And don’t be stuck with the old standards.

Although almost 80% of the FTSE 100 outsource some or all of their IT operations many are also choosing to farm out other key functional areas such as Finance and HR. To cut costs? Not exclusively. By handing non-core operations to outside experts, your business becomes more focused on its real purpose (and you often get a better service). But here, too, it’s important not to hogtie innovation and creativity by writing the contract too tightly. Experts in anything,whether IT or HR, know the strategic relevance of their disciplines better than you do, and you’ll get the best from your partners by giving them the freedom to bring real value to the table.

OF SLAS AND SATISFACTION

Although a smart-sourcing contract is often less constraining in an operational sense, there are still important SLAs. They’re intelligent ones however, based on value rather than blind process.

If the old SLAs said: Do exactly these things faster and cheaper, but don’t give any thought to whether they’re the right things to do, smart SLAs say: Do the right things at a pace and cost that’s appropriate. And if you find a way to do things better, let us know. This sophistication demands new metrics, and smart-sourcing contracts include such things as ‘balanced score cards’ that span business performance, IT user and customer satisfaction, and ultimately shareholder value. In a current relationship with airline operator bmi, Fujitsu is aligning its IT service contract with business performance measures such as on-time ticketing and flight arrangements.

A NEW OUTSOURCING AGENDA

Innovative relationships, such as that between Fujitsu and bmi, are paying such dividends that clued-up suppliers and clients all over the world have begun to re-think the fundamental outsourcing idea to take advantage of four key factors:

• New technologies that can bring about transformational improvements in cost and flexibility of IT infrastructures. An example is Voice over IP that can reduce network costs by as much as 90%.
• New business processes that transform IT departments into high performance operations, witness Fujitsu’s Sense and Respond® approach, which is able to halve incoming support requests by eliminating the root causes of IT systems and network failures.
• New economic models to align customer spend with the changing needs of the business users. Models such as ‘Ondemand’ are being applied to traditional data centres to enable customers to buy only what they need, when they need it.
• New sources of skilled labour. Engineers programmers and call centre staff are now available at a fifth of the cost of European staff in emerging economies such as China and India.

Even if you are still pre-occupied with offshoring and process transformation, you may find this new agenda resulting in entirely different conversations with suppliers.

Always assuming, of course, that your current contract allows such flagrant flexibility and innovation!