Most companies look at an outsourcing initiative as an IT project that needs to get done without determining how this engagement will impact their organization’s financial, operational and personnel processes. Without an outsourcing strategy, the organization may not be focusing on the right mix of processes to be outsourced and won’t receive the full financial or operational benefits that the organization could have received.

We can break down outsourcing strategies into three broad categories that meet different goals:

• Efficiency – the first step in an outsourcing strategy is to achieve cost savings, typically through process efficiencies.
• Enhancement – once cost savings have been realized the next stage is to achieve operational improvements related to business objectives such compliance and meeting availability expectations
• Transformation – business transformation is the end goal for an outsourcing strategy, where an outsourcing relationship is used to drive business performance improvements

Each of these sourcing relationship models requires different management and measurement methods, leading to different deal structures and different impact to the business. In an efficiency deal, for example, metrics and service-level agreements (SLAs) will be tied to cost improvement. In an enhancement deal, metrics will be tied to specific objectives identified in the deal’s business case. In a transformational deal, the service provider is paid for business performance improvement, such as increasing margins, opening access to new customers or helping manage growth.

As you develop your outsourcing strategy, you need to align this initiative to your corporate strategy to ensure that you are focusing on the correct processes and functions to maximize the outsourcing engagements benefits. An effective IT governance model looks at the service provider holistically in regards to the relationship with the outsourcing service provider and the outsourcing initiative. It is imperative that governance be discussed and agreed to from the strategic level down through the operational level. If this isn’t followed, there will be missteps, misalignments and miscommunications throughout the initiative. This includes the management of resources, contracts, relationships, costs and performance.

Look for an outsourcing partner that supports the IT governance approach and that can align to your outsourcing strategy. They should take the time to understand your business challenges and needs, demonstrating a clear expertise to maintain a programmatic approach with proven tools and methodologies that can drive increasing value for your organization.

In summary, outsourcing is about much more than cost savings. When you get the strategy right with the right partner, it’s a journey that can help transform your business

My colleague, Ken Ramoutar recently spoke about business-aligned outsourcing and developed a presentation that I urge you to read. You can also learn about Avanade Outsourcing Services on our website .

This post is part of a blog series by Chas Mullins devoted to uncovering the benefits of outsourcing that touch on strategies and tactics that drive more sales, enhance productivity, increase revenue, and lower business costs. 

So what is the big deal, but first, what is it?

Business-aligned outsourcing is a term recently coined by Gartner but the concept isn’t complicated or new for that matter. It’s really about taking a more strategic view on what and how your company makes and implements sourcing decisions.

First, align the in-source/out-source strategy to business goals. Much of the time the traditional approach is finance-driven with “lets save some money by outsourcing.”  Well, cost cutting may be one of the business goals, but often there are other important goals  such as expanding into new markets, or delivering on new product revenues, or integrating acquisitions effectively. These goals factor into your sourcing strategy just as much as cost-cutting does. At the Gartner event, I asked those in the audience, how many of them had a documented sourcing strategy and very few folks raised their hands. Clearly, just documenting a strategy would be a big step forward for many companies.

Second is the notion of metrics. Every company and function has metrics but the question is “what are the right metrics?” The right metrics are aligned with a sourcing strategy, which of course, is aligned to the business goals. Most of the metrics we see are about cost-cutting, but think about ones you might measure when it comes to enhancing the business or driving more innovation. Yes – you can have metrics about innovation.

Last is the process of governance. This really should be formal and span the executive layers down to the operational layers (see slide 12 in the presentation below). A top to bottom governance strategy is important to ensuring success of your sourcing strategy. There is an element of frequency as well. In the board room, things can be monthly or quarterly. At the operational layer, governance needs to be weekly or even daily for high risk projects. I also asked the audience “how many of you have a governance process,” and again very few attendees raised their hands.

Bottom Line

Business-aligned outsourcing is 1) Strategy 2) Metrics 3) Governance. You’ll get better results!

In order to provide CIOs, IT and Procurement professionals with the essentials around outsourcing, Ken Ramoutar, VP of Service Line Marketing, will be on stage discussing “The Business Alignment Imperative – Are You Prepared?” He will offer insights into the various elements to consider for a successful outsourcing project and insights into lessons learned and how these will enable your organization to benefit from a business align outsourcing strategy.

Here’s a sneak peak at what Ken will cover:

• The importance of business- aligned sourcing strategies
• Identifying metrics that will maximize benefits
• Managing risk to achieve your goals
• Outsourcing case studies with proven results

Gartner Outsourcing Summit 2012 will be an exciting event with an agenda chock full of valuable tracks and sessions. Be sure to catch Ken’s session in the Osceola A session room on Wednesday, September 12 at 10:15am. We’ll also be having a drawing to win a $250 gift card immediately following the session, so don’t miss it.

Whether you are looking at a new outsourcing initiative, reevaluating your current engagement or looking for useful outsourcing insights, Avanade has helped several large organizations with their outsourcing needs and has shown them how to do more with less. As companies look for ways to improve performance and strategically repositioning internal resources, Avanade’s global resources can help rationalize systems in a flexible manner to help companies remain agile and improve time to market.

Come visit Avanade in Booth M at the event to learn more about how we’re working with customers to achieve results with outsourcing strategies.

We look forward to seeing you there!

In other posts, I have alluded to the fact that the cloud computing paradigm, (with it’s pay-as-you-go financial modelling and it’s prescriptive service descriptions), will present a disruptive factor in traditional sourcing, but I thought I would flesh this out a little more.

Fundamentally this is all about what I refer to as the change “From the Artisan to the Engineer”, and this is what i will describe today.

The blogosphere abounds with advice and postings for CIO and IT leaders to move up the value chain from IT as a cost centre, to IT as a strategic partner.  The trouble is, the most difficult thing to do in this situation for many IT organisations is to let go of the traditional activities and expertises which have served so well up until this point.  It follows an interesting parallel of the lifecycle of a developer itself, (shown in the table below).

As you can see, in order to deliver greater value in each step of maturity, at some level this means relinquishing hands on focus on the previous more detailed level. Nobody has the time to do all the detail themselves and still deliver value at higher levels. This is parallel for Cloudsourcing and Traditional Outsourcing.

I have been part of a number of outsources over the years, in one way or another, and have been watching the pattern changing in two ways.  First.. the era of huge (monolithic?) outsources is disappearing in favour of a portfolio of service delivery specialist areas.  Second, (thankfully), the increasing familiarity of the market with the outsourcing model is driving more and more “Outcome Based” arrangements rather than the traditionally micro-managed input.

What does the cloud bring?

1. Cloud brings transparency.  There is no ambiguity around the details of the service you are getting.  It’s not a custom service, it’s a prescriptive service and you can shop around and read the service description to understand exactly what is in it.
2. Cloud brings cost clarity.  It’s pay-as-you-use with a unit cost, and therefore very easy both to predict the spend, as well as to pull on different levers in the organisation to change the level and pattern of that spend.
3. Cloud brings modularity.  Because you are purchasing services and not components, (whether you are buying IAAS/PAAS/SAAS etc), each one is a wrapped service.  Therefore it becomes easier to treat your portfolio of service needs as modules.

So, the arrival of the maturing Cloud phenomenon, coupled with the already inbuilt trending changes in outsourcing means the following.