Tech Industry

Commentary: The ABCs of outsourcing

As the economy forces more companies to sell assets and convert fixed IT into a variable cost via outsourcing, buyers are well-served by remembering some timeless lessons.

Commentary: The ABCs of outsourcing
By Forrester Research
Special to CNET News.com
December 13, 2002, 12:30PM PT

By Christine Ferrusi Ross, Senior Analyst

The economy has forced more companies to sell assets and convert fixed IT into a variable cost via outsourcing.

Some aspects that look like business as usual presage significant changes in the ways deals are negotiated and won. Outsourcing has resurged in terms of media focus and discussion. As the world rediscovers outsourcing, buyers are well-served by remembering some timeless lessons:

• Price is the only important differentiator... For large-scale outsourcing, clients expect vendors to compete primarily on price and how much they will pay for client assets. In fact, in a recent round of interviews with IT outsourcers, each one agreed that outsourcing is a commodity business.

...So outsourcers start to finance each other's deals. Vendors will follow the path of the automakers, getting more profit from financing than from their core business. That will then lead them to offer financing for deals that aren't theirs. Just as someone can buy a Dodge through Ford Financial Services, so too might an Electronic Data Systems outsourcing deal be financed by IBM.

• Vendors' wins come in waves... Although conventional wisdom tells us that deals are won one by one, outsourcers tend to win in waves. IBM's capture of the American Express megadeal and its selection as finalist in the J.P. Morgan Chase deal give it the title for 2002, but in 2001 EDS could do no wrong, and Computer Sciences Corp. (CSC) won many important deals in 2000.

...So smaller outsourcers win more deals by timing the market. Smaller outsourcers like I-structure will track competitors' wins, determine a threshold where they feel a competitor can't take on more work immediately, and use the wins against them. This will include using the traditional integrator tactic of moving beyond the deal cost


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to the team doing the work. For example, Perot Systems could point out to a prospect, "CSC just won a huge deal and has to invest in that. How much time can it devote to your work, and will it give you the class A employees like we will?"

• Clients' RFPs obscure their business goals... Clients initiate an outsourcing deal based on business goals, but their requests for proposal typically zero in on contract terms and conditions like service-level agreements and cost constraints. The result? Four out of five companies report that they have not linked the performance of outsourced processes to internal process improvement.

...So firms will start to hire operations experts for procurement jobs. Just as techies need not apply for CIO jobs anymore, companies saddled with procurement folks that treat everything like a widget will rethink what skills are necessary for that role. They will swap the traditional procurement job profile for an operations background and look for employees who will focus contracts on the end result, not just whether bidders colored within the RFP lines. The best candidates will demonstrate managing projects that achieved projected business results.

© 2002, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.