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PM Essence

Changing Perception of Value in Outsourcing IT Services

By Piyush Jain, PMP
“World is Flat” said Thomas Friedman in his book on globalization. On the same topic Mr. N R Narayanamurthy quoted “I define globalization as sourcing material from where it is cheapest, talent from where it is best available, producing where it is most cost-effective and selling where the markets are -- without being constrained by national boundaries”. This is now reality. Walmart is one example of this reality.

What has changed with Globalization is the way value is being delivered to customers. Companies who want to reach global markets must design products and services beyond the borders.
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They must constantly explore new markets with increasing business complexity. Despite their size, they should maintain agility in adopting changes to avoid becoming out-dated. They should constantly adopt newer technology that simplifies their operations and helps reach out to more customers.

Larger work-force, global talent pools, 24x7 operations and many more have become key drivers for outsourcing.

It brings an essential shift also to the way they engage employees, suppliers and service providers and the way they manage technologies. Global companies have realized that IT outsourcing which started as a means of containing IT costs can now deliver much more capabilities beyond cost reduction.

Cost reduction has become the least reason for companies to outsource. Companies now leverage outsourcing to deliver increased business value. Larger work-force, global talent pools, 24x7 operations and many more have become key drivers for outsourcing. According to Wikipedia® business value is an informal term that includes all forms of value that determine the health and well-being of the firm
in the long-run.


You can see the business value drivers that can benefit from strategic outsourcing approach (marked by red star).

• Achieve faster time to market for their products and services to gain competitive advantage and increase their market share.
• Improve competitive positioning of their products and services through larger product development teams.
• Develop sustainability by increasing resilience of operations; and of course.
• Optimize costs by adopting suitable outsourcing engagement model.

Most of the times, the companies are unable to achieve the above business values under limited existing arrangements with outsourcing vendors. The reason is that the existing arrangements neither make the vendors responsible for such outcomes nor provide them incentives for achieving the outcomes. If so, what should companies do for achieving these objectives?
A. Acquire “Partners” not “Delivery Boys”
Most of the time outsourcing fails to deliver even cost optimization because the cost of managing work outweighs the cost reduction achieved. Companies should learn to engage “Partners” to whom they can transfer higher degree of responsibility with suitable returns. The outsourcing companies must have the scale and capability to handle such a relationship.

B. Adopt newer engagement models
Partners can no more be managed by traditional cost based engagement models like “Time & Material” or “Fixed Price”. Adopt newer engagement models that transfer more responsibility to deliver with commensurate returns. Adopt engagement models based on value delivered rather than work performed. Make them partners to outcomes. Make them an inherent part of your business.
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C. Define ways of measuring Business Value delivered
Establish clear ways of determining how the measurements related to the engagement deliver any of the business impacts for which the outsourcing arrangement was entered into. Define Risk-Reward matrices at all levels from service delivery to business outcomes with clear correlation and contribution factors at each stage of measurement.
In Conclusion, the road ahead?
Outsourcing is now matured to the extent that it is not an option, but an essentiality that clients need for their business. But to truly gain the benefits from outsourcing in the days ahead, both clients and their outsourcing partners need to up the ante for enhanced collaboration to achieve higher value returns on their business. Measurement of success for business will not be restricted to value-for-money based cost game, but rather will be determined by the all-round values client derives from its outsourcing partnerships.