Businesses think the unthinkable

When Peter Lowes, Deloitte Consulting’s outsourcing chief, advises clients on whether to outsource part of their business, he has them place a dot on a grid to pinpoint how core the function is and how much of it they do.

If it is a core, high-volume activity, companies should probably consider becoming an outsourcer in it themselves, he says. Core but low-volume and they should keep it inhouse.

Non-core, high-volume operations are better candidates for outsourcing, but businesses should look first at wringing more efficiencies internally, he adds, while non-core, low-volume functions are ripe for it.

The problem is, “the dots are moving around all the time,” observes Mr Lowes.

What businesses consider core – corporate crown jewels to be jealously guarded inhouse – versus what’s fair game to be contracted out, is a moving target.

Two recent outsourcing deals concluded by Boeing, the US aerospace group, with technology services compatriot IBM and HCL of India show that nothing is off limits.

The contracts are to develop systems for Boeing’s US defence contracts and its upcoming 7E7 Dreamliner passenger jet. They bear witness to the fact that even the capacity to innovate, hitherto considered the crucible of competitive differentiation, is fair game for outsourcing.

A wave of so-called business process outsourcing is driving outsourcing further into the enterprise.

“Companies are saying: ‘Our competitive advantage lies in knowing our customers and designing products [around] their needs. Everything else, they’re considering outsourcing,” says Lance Travers, at AMR Research.

Outsourcing of IT-intensive functions such as procurement, human resources and finance and accounting systems is projected to grow at a brisk 9.7 per cent this year to $125.9bn in contracts, according to Gartner Group.

This would outstrip the 7.7 per cent global growth in more mature IT outsourcing, spanning desktop computers, network management, data centre operation, and software support and development.

With business-driven contracts has come a more expansive vision of outsourcing, with vendors contracted to deliver on business performance goals, as well as reduce costs.

“It’s a different conversation from traditional IT outsourcing. The notion of business value is very much to the fore,” says Laurie Tropiano, IBM’s vice-president, business consulting services.

Last year, US business information provider Dun & Bradstreet commissioned IBM to run key data processing operations with related customer services and financial systems. The seven-year $180m contract is contingent on IBM improving operational efficiency and customer service.

“There’s a convergence taking place between consulting and outsourcing,” says Mr Travers.

David Cearly, vice-president, emerging trends, at Gartner Group, says: “Companies are starting to think of their businesses in a more modular manner, [rather than] a vertically-integrated model.” It shows in the more discriminating way they are outsourcing.

“We’re seeing a lot more discrete deals, where the network goes to one company, desktop [computers] to another and the data centre to a third,” says David Tapper, IT outsourcing director at industry researcher IDC.

French carmaker Renault announced plans last year to farm out its IT infrastructure in three tranches to Atos Origin, Computer Sciences and Hewlett-Packard.

Companies have recoiled from being beholden to a single supplier amid the recent spectacle of several aggregated one-stop-shop mega-deals unravelling in mutual recrimination, say analysts.

But the trend towards smaller, shorter-term deals is also informed by the quest for quicker results and specialist expertise.

Dutch financial services group ABN Amro signed a monumental $2.24bn IT outsourcing initiative last month, which divvied up tasks across a portfolio of discrete contracts. Chief information officer Lars Gustavsson said: “There’s no single vendor that can satisfy all [our] needs.”

The pact was hailed as a landmark vote of confidence in offshoring.

The Amsterdam-based bank entrusted the most valuable outsourcing contract yet to Mumbai-based Tata Consultancy Services for a record $250m to help run bank-wide software systems.