HBR

23 Years Later (outsourcing then and now) blog

Occasionally, Harvard Business Review re-publishes a ‘classic’ article. These are always interesting and, provide a revealing window into leading business thinking at a particular point in time. One such article is “IT Outsourcing: Maximize Flexibility and Control“ written by Mary Lacity, Leslie Wilcocks and David Feeny in 1995. The authors tackled several inherent issues of outsourcing agreements of that time and considered the implications of the (then) new trend of ‘selective sourcing.’

The outsourcing industry today is almost unrecognizable from how it looked two decades ago. And yet, it’s astonishing how applicable many of the concepts covered by Lacity, Wilcocks and Feeny still are. In particular five assertions from the mid 90’s stood out as every bit as relevant today as they were back then.

Long-term deals are bad for clients – The article makes the observation that five to ten year outsourcing agreements of the 90’s incorrectly assumed that a client could predict future business and technology developments with a high degree of certainty. Back then that was just an opinion, but time has shown it to be correct. The paradigm where managed services are ‘bought forward’ with defined pricing for a decade simply doesn’t work. Rapidly evolving technology, flexible service delivery models and disruptive business and economic environments mean that predicting the future has never been more perilous.

Flexibility and control are key – In 1995, the authors asserted that the overarching objectives of outsourcing agreements should be to maximize flexibility and control thereby enabling the client to pursue different options over time as circumstances dictate. They hit the nail right on the head! As I wrote in a previous blog post, “Continuously Contemporary Contracting”, it is critically important to have a rigorous and well-defined contract … but it is equally important to realize that change is a constant. At Integris Applied our core philosophy is to periodically address changing needs and an evolving market place. This is the basis for a framework of equitable change – a framework that includes the contract, but also the governance structure and forums that represent the shared interest of all parties.

Selective sourcing lowers switching costs – The article highlighted that one of the advantages of dividing IT requirements into ‘manageable’ chunks (and awarding to multiple providers) is lower costs to switch suppliers – or even bring services back in-house if a supplier proves to be disappointing. Many organizations have since expanded on this point and best-in-class IT service delivery is now often positioned as a ‘platform’ of integrated service components (servers, end-user computing, mainframe services, etc.) provided by a mix of internal and external providers. A key benefit of this approach is ‘plug and play’ compatibility that allows the addition, removal or substitution of service providers (or service components) with minimal or no disruption.

Clients often underinvest in governance and contract management – The article highlighted two separate, but closely related truths. First, that technical people accustomed to running an internal IT operation can’t always make the leap to managing an outsourcing contract. Second, many (I would argue most) companies underestimate the importance of contract management and mistakenly assume that “overseeing the contract requires little more than assigning someone to review the supplier’s monthly bill.” Then and now, outsourcing agreements contain hundreds of obligations and deliverables that require active management. Combine this daunting task with the need to manage supplier performance (service levels and other operational reports) and invoicing (an increasingly complex task of confirming consumption and compliance) and it’s obvious that a well-run contract management organization is a critical component to the overall outsourcing governance forums (both operational governance and relational governance).

Integration is vital to the seamless delivery of IT Services – The article argued that very few companies had systems integrators and this resulted in service gaps and (perhaps inevitably) lead to the rise of ‘shadow IT’ organizations springing up across the organization. This still happens today and to avoid it in multi-vendor environments, service delivery integration is more important than ever. Take for example problem management, incident management and/or maintaining a Configuration Management Database (CMDB) in a multi-supplier environment – someone has to coordinate these activities on behalf of the platform. At Integris Applied we are strong proponents of the Multi-Supplier Integrator role (MSI) and believe that managing a world-class IT service delivery platform requires balancing the self-interests of service providers with the shared-interests of the platform itself.

Of course, Lacity, Wilcocks and Feeny didn’t get everything right. They believed that the internal IT department should be encouraged to participate in the bidding process and cited two advantages. First, that it “motivates employees to find ways to provide good service at lower cost,” and second that “companies gain a deeper understanding of the costs of a service and the best way to provide it.”

Time has shown that this perception is flawed! It isn’t necessarily the idea of an internal team bidding for the work per se; it’s the over-emphasis on cost. At Integris Applied we have collectively supported hundreds of third-party agreements and have learned that when cost savings are the sole focus of an agreement, there is rarely a successful outcome. It’s worth noting that when internal teams are part of the bidding process it also introduces some key challenges such as putting a significant burden on the internal teams to develop an appropriate bid while at the same time supporting day-to-day operations and introducing inevitable bias into the evaluation and selection process. In most instances, our experience has been that once a decision is made to outsource, it’s best to deal solely with external bids.

Overall, the key tenants of “IT Outsourcing: Maximize Flexibility and Controlwere impressively prescient. The world has changed beyond imagination, with ITIL processes, robotic process automation, artificial intelligence, blockchain, as-a-service, Internet of things and a whole host of other innovations. And yet, with just a few tweaks, the ideas of Lacity, Wilcocks and Feeny are still (largely) applicable in today’s outsourcing environment.

– John Pirtle, June 2018 – [bio]