Business drivers

Paybacks

Every outsourcing contract is different, so establishing consistent metrics to measure return on investment (ROI) is difficult.

Chip Gliedman, a research fellow at Giga Information Group, suggests that organisations list all the relevant expenses for a project as if it were to be handled in-house, and then list the cost of outsourcing those functions. They can then project how much the project will cost on a year-by-year basis, as well as the total overall cost, to calculate how much of a saving has been made.

Gliedman also advises organisations to attach a monetary value to any benefits that have been realised – for example, being able to charge more for a product because it is early to market.

Market models

There are three types of outsourcing contract, according to research group Gartner.

1. Utility deals. Accounting for around 85% of all outsourcing contracts, utility deals are purely focused on cost savings or cost containment.

2. Enhancement deals. These account for around 15% to 17% of deals. ‘Enhancement’ implies that the contract is based on making the function or process that is being outsourced more effective, not just more efficient.

3. Frontier deals. Sometimes referred to as ‘business transformation outsourcing’, frontier deals are high-cost, multi-year contracts that focus on re-engineering entire business processes or functions within an organisation. Because of their complex nature, these only account for around 2% of deals, and tend to be led by major outsourcers such as IBM Global Services.

Big deals and key players

The size and scope of outsourcing has increased dramatically. At the end of the 2002 calendar year, there were at least 14 ‘megadeals’ (those exceeding $1 billion) worth a total of $28.4 billion, compared with nine megadeals in 2001 worth a total of $15.1 billion.

But who is winning all this business? Of the 14 deals signed, IBM won seven, and shared an eighth deal with Keane. Computer Sciences Corp (CSC) won one and EDS won two deals, but both were in final discussions for several, separate megadeals at the close of 2002. HP and Fujitsu landed their first megadeals, and CGI landed its third.

A review of the past 12 years of megadeals by analyst company Gartner shows that EDS and CSC were clear early leaders in this field, but IBM quickly surpassed them and now has a total of at least 32, nearly the same as EDS (21) and CSC (15) combined.

Deal watchers

The ability to manage outsourcing relationships effectively is increasingly becoming a competitive differentiator. Consequently, more and more organisations have either created a role in-house to oversee these relationships, or have brought in third-party benchmarking companies.

This trend has led to the emergence of a ‘chief sourcing officer’ in some companies, who sits between the IT and human resources departments and whose job it is to source skills – whether internally or externally – as projects arise. “It’s a bit like the casting director on a film set,” says Ian Marriott, an analyst at Gartner. This role will become less and less IT-focused over time, adds Marriott, and will ultimately report directly to the CEO.

Another approach is to seek outside guidance. Companies such as Morgan Chambers and TPI provide advice on both building and managing outsourcing deals – from the early contract development stages to ensuring that the conditions of the contract are met. These companies frequently use benchmarking data from previous projects to analyse how a supplier’s services compare, based on parameters such as application availability, SLAs and support.