Businesses are in danger of losing control of their outsourced IT projects due to a lack of internal leadership and poor business sourcing strategies.
A new study commissioned by LogicaCMG found organisations must retain key skills and competencies in their in-house teams if they are to truly benefit from relationships with outsourcing suppliers. Entitled "Building Core Retained Capabilities," the paper was prepared by Leslie Willcocks, professor of technology, work and globalisation at the London School of Economics.
The research shows that organisations are currently prioritising short term cost reductions over an "invest to save" strategy, resulting in a number of outsourcing projects developing problems such as loss of control, inadequate service, and constant renegotiation due to a lack of strong internal leadership and project management. As organisations outsource more to achieve strategic advantage, they will need to adopt nine core capabilities.
Willcocks said this is important because by 2012 about 58% of the average corporation's IT budget will be spent on outsourcing.
He said the nine core capabilities include leadership, business systems thinking, relationship building, architectural planning and design and informed buying, which lean towards softer business skills. The consequences of failing to invest internally in these core competencies are sizeable and include high contract costs.
Willcocks said investment in these capabilities is expensive and the cost of managing the contract will be 10% to 12% of the total by 2010.
"Organisations must spend- to-save now, by investing in the right internal skills to develop long term strategic benefit," he said.
The study reveals that in practice the recruitment and retention of individuals with these capabilities is confined to a small, high quality group, compounded further by the fact that current retained functions tend to possess strong technical expertise but are weaker on business and interpersonal skills.
This results in a major human resources challenge and organisations need to be prepared to upskill and recruit to provide the right resources and support to create a successful in-house team.
"In 15 years of research we have found that organisations are continually faced with a key challenge – what needs to be outsourced and what needs to be retained? We have found a link between the lack of investment in core in-house capabilities and the disconnect it creates between the outsourced function and the retained portion of the enterprise," he said.
"Skills such as relationship management through senior management attention, contract, structure and refined capabilities can create a 20% to 40% difference on service, quality, cost and other performance indicators. If organisations are to benefit from outsourcing, a real change of focus is needed; from activities and assets to leadership, management and appropriate staffing." LogicaCMG's chief executive of global service delivery Martin Blackburn said the focus has always been on the benefits of IT outsourcing, with little discussion on what kind of team organisations need to retain to manage their suppliers.
Blackburn said the report highlights that all too often organizations under-invest in building core capabilities due to cost.
"The result is that they miss the chance to pre-empt problems by not having a workforce with the capability to perform at the levels needed to maximise both success and achieve an optimal cost-effective outsourcing arrangement," he said.
In addition to assessing the current IT outsourcing landscape, the paper makes some key predictions for the outsourcing market in the future, especially in the areas of global sourcing, supplier strategies and client developments. Key predictions include the rise in business process outsourcing activity overtaking IT outsourcing and the increased prevalence of nearshoring.