Application outsourcing, the management and upgrades of packaged or customised software that is contracted out to a service provider, has come a long way since the Y2K projects of the 1990s.

The Y2K, or millennium bug as it became commonly known, was a problem for both digital (computer-related) and non-digital documentation and data storage situations, resulting from the practice of abbreviating a four-digit year to two digits. Consequently, many projects related to the Y2K syndrome were outsourced on a large scale, with organisations seeking to acquire additional competence especially in applications during this stage.

Traditionally, the process of an application outsourcing strategy can improve business effectiveness by promoting a tighter focus on managing costs. With the Y2K era potential costing companies millions in lost revenue, this approach made perfect sense. Since then, as marketplaces have expanded to global proportions and competition has increased, application outsourcing must remain cost-effective, by providing development and maintenance resources at price points that organisations could not previously obtain locally or internally.

Time for change

However, post Y2k, it hasn’t taken long for organisations to realise that application outsourcing’s attractiveness, as a cost-cutting exercise, is only one part of the story. While there will always be a place in every business plan for cutting costs, there is also room for new opportunities and fresh approaches. Organisations now have access to new talent, advanced techniques and technologies that can deliver additional benefits, most notably faster time to market for new applications and upgrades alike.

For example, if you take the healthcare sector, many hospitals can now provide a hosted application platform that enables them to gain access to advanced clinical IT solutions in a shared resource or dedicated server environment. Application outsourcing platforms can also enable hospitals to deploy technology faster, more affordably and using fewer internal resources.

As application outsourcing solutions continue to evolve, transforming from a strictly tactical solution to a strategic one, companies will be able to deliver measurable business value and competitive advantage. However, in order for organisations to embrace this, they need to overcome a number of challenges.

Success brings new challenges

In the near future, it is my view that application outsourcing will need to address a variety of challenges, some external and some created by the very opportunities it has itself created. For example, application outsourcing’s ability to deliver significant cost savings has enabled organisations to put new downward pressure on IT budgets. As a result, many IT departments are being challenged to transform one-time or short-term savings into repeatable, consistent efficiencies. Many CIOs are also looking for application outsourcing solutions to provide sustainable savings that can be used to self-fund new business-oriented projects.

Secondly, Governance is another area where, up until now, application outsourcing may have created as many challenges as it has solved. For example, organisations that have embraced application outsourcing with numerous projects and vendors have begun to realise they may actually have made their processes and models more complex. Moreover, they may even lack adequate processes when integrating across cultures, languages and time zones.

Thirdly, risk management is probably the most obvious challenge inherent in application outsourcing. CIOs are constantly looking for new ways to offset the risks that come with offshoring. These risks arise from such varied sources as language barriers, political unrest, or natural disasters such as typhoons or earthquakes.

However, not all the challenges application outsourcing will have to address in the future are of its own creation. As CIOs and their organisations become more comfortable with the concept of application outsourcing, they are asking themselves if their current outsourcing solutions are doing everything possible to help the business achieve its objectives. Therefore, it is down to the vendor to combine this new emphasis on business objectives with the existing emphasis on IT objectives.

The future

The application outsourcing choices that an organisation makes can now help to ensure that future is more company-friendly, allowing themselves to embrace change without having to commit to massive disruptive transformations over a short period of time. To achieve this goal, application outsourcing solutions will need to work hand-in-hand with infrastructure and a myriad of application solutions, from in-house custom applications to new Internet applications.

As CIOs continue to align their internal efforts with an organisation’s business goals and objectives, outsourcing solutions will, by necessity, follow suit. In the near future, it will no longer be the CIO and his or her department who are solely responsible for this business-IT alignment. Outsourcing vendors in general—and application outsourcing vendors in particular—will be retooling their processes and methods in order to measure and substantiate an outsourcing solution’s business value.

Ferenc Szelenyi is managing director EMEA, Dell Perot Systems