Third Generation IT Outsourcing

By James Cockcroft Director of Coeus Consulting

Outsourcing of IT has evolved over the years and whilst the original ‘1st Generation’ single service provider outsource deals were mainly targeted at saving money, they were also about pushing the risk of delivery onto the external supplier. Some of key drivers for shifting the risk onto a supplier were around in-house staff; specifically skills shortages and attrition issues.

As technology has evolved, and IT services have become more critical to core business delivery, mature organisations have moved to more agile multi-sourcing models. These ‘2nd generation’ contracts are based on selectively sourcing elements of an organisations IT services. Rather than focusing on replicating an organisations IT services delivered at lower cost, the key outcomes of this type of outsourcing model are to utilise the best fit suppliers for each IT service to enable the transformation of those IT services in order to deliver real and beneficial technology change to support business strategy.

In multi-sourcing, the customer enters into separate, parallel agreements with different suppliers for different parts of the services to be outsourced. A typical multi-sourcing model might involve Supplier A performing data centre functions, Supplier B performing desktop functions and Supplier C performing network functions. Additionally one of these suppliers (or a separate supplier) can also act as “operational integrator” of services performed by other service providers.

Many second generation contracts underestimated, or simply ignored, the criticality and complexity of integration that would be required. This is one of the main differentiations between second and third generation contracts.

Third generation outsourcing aims to provide the best blend of internal capability and external multi-sourcing to ensure delivery of flexible and cost effective IT services which align with business priorities. A long term strategy should be through first of all, looking across all potential IT services and determining the right balance of choice, flexibility, commercial tension and suppliers (internal and external).

Whilst most organisations will have a degree of multi-sourcing, as they typically would have separate application providers to infrastructure, any more granular level of sourcing does require very careful planning. At the heart of successful multi-sourcing organisations is a clear and precise operating model which allows all parties to clearly understand the service boundaries and hand-off points between both the customer and all suppliers and between each supplier.

Choosing which services to retain and which to outsource is key to delivery business value and enabling a good multi-sourcing environment. Some suppliers are naturally more ‘threatening’ to others and therefore this can creates an environment of non-cooperation, typically specialist or tier 2 suppliers are more accepting of multi-sourcing and have higher levels of cooperation with other suppliers in the IT services eco-system.

Finally, the original challenges that organisations face 10-20 years ago need to be addressed head on. Whilst on the surface in-sourcing aspects of service might appear to make sense and give greater control back to the client; this approach is not right for every organisation and careful consideration needs to be made as to whether or not the client could perform those services better in the long term than an IT supplier.

So, whilst it’s unlikely that IT sourcing will go full circle, there is a growing trend for clients to take greater control and management of critical service components. Taking on board the lessons the industry has learned from 1st and 2nd Generation contracts it should be third time lucky… at least for now…