How is outsourcing helping the US
As before, the argument of cost reduction is in the foreground for well over 80 percent of those companies that have decided to outsource IT tasks to external service providers. A recently completed study by the renowned Templeton College, Oxford, is rather skeptical in this regard: only around 50 percent of the implemented outsourcing projects have actually led to savings. The reasons for this lie in particular in changed performance requirements for the outsourcer, in unforeseen technological developments as well as in inadequate measurement parameters and price lists for the services to be provided and the service level.
The second motive for outsourcing is an expected increase in performance by the external IT service provider. However, this argument was the decisive factor in just under 20 percent of all previous outsourcing deals.
The pressure to increase performance through outsourcing often results from the realization that one's own IT competence is no longer sufficient to meet new requirements with the most modern information and communication technologies at the speed at which such services are required.
Finally, a special case for linking IT services and own business development is the fully variable billing of IT services according to the number and / or profit contribution of business transactions. Account management and billing systems at financial service providers are typical applications here.
German companies are reluctant to outsource
In contrast to the Anglo-American world, extensive outsourcing projects are a rarity in this country. While there are numerous mega-deals in the USA and Great Britain with a contract volume of well over a billion dollars, outsourcing contracts that, for example, IBM, Debis or EDS have concluded in Germany in recent years, even with longer terms, are only in the double-digit million range.
In large German companies there is a lack of willingness to outsource IT tasks over a long period of time. The reasons for this lie in corporate management that tends to be more long-term oriented, a different assessment of the risks that result from long-term outsourcing contracts, but also in a stronger bond between management, employees and employee representatives.
Outsourcing for cost reasons obviously only has a chance here if the company's situation justifies such a step in the long term. It is therefore not surprising that it is often automotive suppliers who dare to take this step - this industry is known to be exposed to considerable pressure to cut costs.
In contrast, the willingness to selectively outsource has grown significantly in the last two years, so that it is prospering overall. The focus is on software development projects, the establishment and operation of corporate networks and computer operation. Maintenance services for legacy systems, help desk functions and the complete management of end-user equipment (PCs, peripherals and LAN servers) are also gaining in importance.
Companies that carry out selective outsourcing in a targeted manner and are not only guided by situational capacity bottlenecks, pursue a clear strategy of concentrating on core competencies.
In contrast, we are convinced that order and organizational tasks are core competencies of an IT department. They are not suitable for outsourcing, but rather determine the effectiveness and profitability of a company's IT investments.
The USA has taken on a leading role as the home of outsourcing. Outsourcing businesses are still developing first in the USA.
In the area of data center services, in addition to the classic host operation, external parties are already practicing to a large extent the operation of client-server systems. The developer and system integrator of client-server applications is given responsibility for the operation and maintenance of the system.
Large American companies are already making intensive use of the external new development, maintenance and further development of application systems in low-wage countries (offshore programming). The linking of IT services with other operational services, such as collection and billing of parking tickets for a city administration together with the operation of the applications, is much more popular in the USA.
A product that has been specific to the German market so far is "SAP outsourcing", ie parameterization, implementation, operation and maintenance of a SAP system, often in connection with the replacement of old systems. The American market is lagging behind here - but not long in view of the growing market shares of SAP in the USA.
In the United States, too, lowering costs is the prime motive for outsourcing. In addition, companies tried to improve the liquidity and personnel situation by selling fixed assets and handing over personnel to the outsourcing provider. In this respect, there are parallels to the economic outsourcing motives in Germany.
The strategic motive for outsourcing, namely the concentration on the core competencies of the company, can often be found in the USA. Companies like Kodak, Xerox and Sun Microsystems made this decision out of strategic considerations. In many cases, they have not only placed the IT area, but also other corporate functions in the hands of external service providers. Obviously, American managers find it easier to develop visions of a "virtual" or "networked company" and to put them into practice.
The different assessments of the strategic motivation of outsourcing must not hide the fact that the whole thing now also has to withstand a more realistic approach in the USA - after a phase of euphoria in the early 1990s. At least this is the result of a survey of 115 US companies, 50 percent of which practice outsourcing.
In particular, they do not trust the providers to be able to operate the entire IT or parts of it competently and effectively for the user. For this, American users mainly cite the conflicting interests between the provider and the outsourcing user. On the other hand, the pressure on IT managers in the company to include outsourcing in the planning has increased.
The tendency of companies to enter into ten-year contracts has declined in the United States. Likewise, the willingness to use only a single provider has decreased. It is therefore not surprising that "selective outsourcing" is now being propagated.
Behind this there are two different, albeit not contradicting, procedures: On the one hand, not all IT tasks are assigned to a single multifunctional provider, but individual task packages to specialized service providers. So one hopes to hire the best specialist for networks, applications, databases, etc. in each case.
On the other hand, there is also the "second vendor" philosophy, according to which two providers are engaged for services, so that there is constant competition between the two. This compensation of risks is of course opposed to a corresponding internal coordination effort (purchasing, coordination of problems and support organization, billing) as well as the provision of a high level of IT know-how.
The experience of American companies with outsourcing shows that a closer look at the success factors is correct. The fate of an outsourcing project is likely to be sealed in the early phase when a business organization is discussing the topic in general. The results of American case studies confirm the authors' experience with German companies. For the result of an outsourcing decision (whether a corresponding contract is concluded or not), "political" reasons are almost always decisive, provided that the economic facts make outsourcing appear sensible.
The reputation and assertiveness of IT in the company are often decisive. In this way, strong IT departments and managers who report directly to the board of directors and are closely involved in the company's planning and decision-making processes can align the outsourcing project in an advantageous manner.
They succeed in doing this by clearly explaining the IT functions that are indispensable for the company and, on the other hand, making the more easily substitutable functions accessible to selective outsourcing. A weak IT department, on the other hand, will not have much to oppose an outsourcing study, as management does not see the benefits of having its own IT.
Excessive expectations cause projects to fail
The success of an outsourcing relationship depends largely on how detailed and comprehensive the contract was. In many cases, outsourcing businesses fail due to excessive expectations on both sides because they are not contractually secured. In addition, specific contractual arrangements help to reduce the risks from the outsourcing contract. Agreements on contractual penalties in the event of non-compliance with service goals and deadlines should be included, as should the possibility of inviting other providers for partial services.
Another success factor is the integration of the IT department into the management of the company. If there is a lack of understanding on the part of the board of directors and department heads for IT matters, if there are no competent decision-making bodies for IT questions or if there is a lack of IT strategy and medium-term planning, the problems are only postponed by outsourcing, not resolved. Much worse still: If the outsourcing provider - also driven by profit interests - does not have "IT conception and demand competence" on the customer side, a company can easily become the provider's plaything.
Minimum requirements for successful outsourcing
In principle, the success of an outsourcing measure can obviously best be achieved by:
- the company's management (board of directors and executive bodies) defines the objective and scope of the outsourcing early, clearly and honestly;
- the minimal IT management processes are or will be installed and functional as soon as the definition and selection process for outsourcing begins, as well as
- The supplier-company relationship is based on a long-term, hard-negotiated, but fair contractual basis.
* Dr. Matthias von Bechtolsheim is Senior Manager, Dr. Wolfgang Zillessen Vice-President of the Arthur D. Little International consultancy in Wiesbaden.
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