Butler Group believes that strategic sourcing, the contracting out of business services to a third-party, has reached a stage where every organisation must evaluate its potential benefits, and is likely to gain significant benefit by adopting sourcing as an integral part of its business strategy. This report addresses the three key areas of IT sourcing - the extended Service Provider (xSP) market, the outsourcing of specific IT facilities on a bespoke basis, and off-shoring - the use of an organisation with overseas workers to deliver an IT solution.
As business processes become increasingly deconstructed, the organisation must focus on its core competencies, where it can truly add value. For non-core processes, the capital costs, skills retention, and associated risks can be devolved to a provider with expertise in that area, allowing the organisation to concentrate on improving its primary business activities. The quality and choice of and from third-party providers has improved dramatically, and technology now enables a more efficient delivery of external IT services.
The xSP Market
The xSP market offers many different types of service, ranging from application provision, network services, Web-site hosting, storage services, and Internet access, to more specialised services such as infrastructure management, security services and wireless application delivery. There are few businesses that do not already consume some of these services, and Butler Group predicts that the world-wide xSP market (excluding network service provision) will grow from US$7 billion in 2001 to US$26 billion by 2005.
The Application Service Provider (ASP) market in particular has underperformed in comparison to the hype that was initially generated. Butler Group notes, however, that most of the major software and infrastructure vendors (including Microsoft, IBM, Oracle, Hewlett Packard, and Sun) are now developing a strategy for delivering software as a service, and we believe that this market will mature considerably over the next four years.
The major benefits that can be derived from use of an ASP include:
Customisation is the key to the successful delivery of an application from an ASP. The increased use of eXtensible Markup Language (XML) has enabled the market to move forward from the 'one size fits all' philosophy, and Butler Group advises that businesses should reject those providers that are unable to customise the service to their requirements.
Outsourcing
Outsourcing of IT facilities ranges from specific areas such as helpdesk provision or application development, right through to the outsourcing of the whole IT function, including infrastructure, staff, and the related business processes. Butler Group considers that this strategy is particularly relevant in an uncertain economic climate, when the flexibility to expand or contract the business can be vital. Additionally, outsourcers can offer economies of scale to reduce the costs associated with maintaining established and legacy systems, and allow forward investment in newer technologies.
Butler Group forecasts that the worldwide market for outsourced services will grow from US$75 billion in 2001, to reach US$175 billion by 2005. As with the xSP market, this growth is driven by a renewed focus on core business activities, and is further boosted by the current economic downturn.
Outsourcing contracts typically extend over a longer period than those in the xSP market, and it is essential that companies establish a true partnership with an outsourcing provider, which allows both companies to benefit over the lifetime of the agreement. Butler Group believes that selective (or smart) sourcing is an effective option, allowing an organisation to gauge the value of the strategy, without committing the whole of its IT capability into the hands of a third-party.
An organisation choosing to outsource must clearly understand the requirements, know how implementation will take place, and be able to assess the benefits that it hopes to derive. It is therefore necessary to develop both meaningful measures of performance (which should be business-relevant rather than purely IT focused), and to build corresponding incentives into the contract. Above all, close attention must be paid to the governance of the relationship - this is the key to maximising the investment in these services.
Large companies such as IBM, EDS, and CSC dominate the outsourcing market, but there is also rapid growth in outsourcing services offered by smaller organisations that are targeted at a correspondingly smaller size of client. Butler Group believes that there is enormous potential for both outsourcing and service provision in the medium- to large-sized organisation (500 to 5,000 employees), which has yet to be successfully addressed.
Off-shoring
The use of overseas workers to deliver IT solutions is prevalent amongst large organisations, with over 50 per cent of FTSE-1000 companies adopting this strategy for at least some of their application development work. The reasons for the popularity of this type of service include:
The off-shoring market is dominated by India, which has made a sizeable investment in IT education, as well as offering incentives to software companies to set up this type of operation. India has over 50 per cent market share, whilst other significant locations include South Africa, Sri Lanka, Eastern Europe, and China.
Butler Group forecasts significant growth in the off-shoring market over the next four years, with the worldwide market value rising from US$17 billion in 2001 to US$50 billion by 2005.
Off-shoring companies have gone to great lengths to ensure that the language skills, culture, and business practices that they offer are suited to the markets in which they operate. Many companies have set up subsidiaries or maintain satellite offices in their target markets to provide local project management, as well as their development locations off-shore. Butler Group considers that a local project manager is essential to the smooth working of an off-shoring relationship.
Conclusions
The range of skills required by a modern IT department is huge, expensive to maintain, and often unmanageable. It no longer makes sense to provide all IT services in-house when there are efficient alternatives that have addressed the issues of control, security, cost, and viability that have in the past been the major barriers to outsourcing.
Butler Group emphasises the point that a poorly focused IT department cannot hope to take advantage of new technologies that can give the business a competitive edge. It is much better to outsource the routine IT processes to a specialist provider, and to concentrate on those added-value areas that lie at the heart of the business. This may indeed extend to the entire IT function, where the operation of this business unit can best be managed by a third-party with the appropriate breadth of services and IT expertise.
Companies of all sizes are recognising that IT is a utility, a service provided to the business in the same way as any other. How it works is no longer an issue, provided it does the job required, and where a third-party can provide or manage a service more efficiently, it is prudent to follow that route. Butler Group believes that sourcing will show strong and steady growth in the period to 2005, and that every company should make a careful assessment to determine which of its services can profitably be delivered by an external provider.