Is transformational outsourcing the right response to changing market requirements?

Katy Ring, Practice Leader

Most outsourcing service providers are positioning themselves as transformational outsourcers, but is this a wise strategy?

What is transformational outsourcing?

Transformational outsourcing refers to consulting-led contracts where management consultants work with a customer to improve the performance of a business process or area of business functionality. The redesigned business process then requires redesigned or new systems, and so another part of the service provider company (the systems integrators) comes in and performs this work. Finally, the outsourcing arm of the service provider business comes in and runs the system, with an up-front contractual agreement that during the life of the outsourcing contract the improved system will yield an agreed business outcome that is based upon the benefits bestowed by the process and system redesign. With a finance & accounting (F&A) process that outcome could be an agreed improved time, from booking orders to billing for them; within a customer call centre solution the business outcome may be, say, a 20% reduction in customer churn.

Clearly no outsourcing provider could enter such an agreement without having the whole design, build and run lifecycle of the project owned and managed within its own organisation. A key assumption of transformational outsourcing is that a sole source service provider controls the process and system performance driving the agreed business outcome. Accenture excels at contracting such deals, while many other service providers struggle to get the design, build, run transformational project cycle to work for them because they are not consultancy-led companies by heritage.

Outsourcing should be business-aware, not transformational

Transformational outsourcing has become a favoured supplier strategy because all suppliers of IT outsourcing are challenged by the bleak prospect of operating in a commoditising market with low margins. The prospect, whether bleak or not, is a real one. The knee-jerk response to the challenge is to attempt what low cost, low margin suppliers do not and cannot do, and that is to add 'business value' for their customers. The irony is that while demand for IT outsourcing remains strong, the market opportunity for grandiose transformational outsourcing seems rather limited and may, in reality, only be able to sustain a few companies with the ability to deliver such contracts.

A far more addressable market opportunity lies with business-aware outsourcing, where teams of technical consultants and systems integrators work together to adapt existing systems to the changing requirements of the customer organisation's business during the length of the contract. This far humbler but much less risky type of contract is within the ability of most IT outsourcing companies. It lets the customer business get on with running its business while outsourcing supporting IT to one or many service providers. From our understanding of customer requirements, this is much more in step with market demand. However, although the vast majority of outsourcing service providers offer this type of business-aware service today, it has been subsumed by the marketing around transformational outsourcing. In our view most service providers would be well advised to move away from positioning their outsourcing capability as transformational.

Four reasons to ditch the transformational positioning

• While it is true that customer organisations become frustrated by service providers that take a 'your mess for less' attitude, that does not mean they wish to tender an invitation for their IT outsourcing provider to transform their business. What most customer organisations want is actually quite straightforward - they want their mess tidied up to better support changing business requirements. In other words, they want, in a mainstream sense, their systems kept up to date with technology advances during the lifetime of the contract in order to support changing business goals. They do not want the same mess back at the end of the contract. This is actually a reasonably modest requirement for business-aware outsourcing and it does not indicate a pent-up demand for transformational outsourcing.
• Customer organisations will continue to operate with lower infrastructure budgets (as proportion of revenues) than today. The last thing such budget owners will find attractive is a type of outsourcing that is highly complex, highly risky and offered at premium pricing levels. Transformational outsourcing screams all three of those qualities and is generally out of step with the market.
• Customer organisations are increasingly moving to multi-sourcing or selective sourcing strategies. In either of those strategies the customer's retained CIO office has decided to act as the central hub, managing a few service providers in peer relationships to deliver IT services. With these sourcing models it becomes virtually impossible to sell transformational outsourcing, because the business premise of the transformational deal is that the sole provider runs the whole transformational lifecycle and thus controls the business outcome.

The CIO office is evolving and the individuals ultimately responsible for the success of outsourcing projects are themselves becoming more business literate than ever before. This is why such people are beginning to be far less concerned with 'how' services are delivered and far more interested in what is being delivered and why. In most cases, such individuals view service providers as providing external services to support their CIO role in aligning business with IT; they do not wish to hand over their role to a business consultant - the CIO is the transformational agent, not the outsourcer.

Dr Katy Ring is Practice Leader, Outsourcing, within Ovum's IT Services analyst group. She leads a team that is frequently retained by clients from the IT services, telco, software and hardware sectors.