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Issue of June 2004 
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Focus on core processes

Outsourcing non-core functions like applications development and LAN & clients infrastructure are the hot areas in enterprise outsourcing. It's a good sign since IT priorities are mostly focused on core issues. by Soutiman Das Gupta

The top three business priorities for CIOs in the FY 2004-05 reflect the growing focus on core business issues. The question is: What happens to the various functions that are not central to the business but vital for the smooth functioning of the organization? There are various non-core, yet important IT tasks like developing and maintaining business applications, managing LAN and client workstations, handling customer help desk and so on.

A good idea here is to outsource these functions to another organization that has expertise in the particular area, in the process freeing you IT staff for managing more business-critical issues.

In the last one year nearly 27 percent of the companies have invested in outsourcing. And the amount of investments made by companies in the last year compared to that of the next year will be unchanged. Among those companies who will invest in outsourcing in the next year, most of them are large industries. The smaller companies do not seem to be keen to outsource, since their needs are comparatively less.

What will be outsourced?

Applications development and management is the most active area of outsourcing for companies. 58 percent of the companies that are outsourcing or making plans have focused on application development and management, and management outsourcing. Overall, 47 percent are planning to outsource LAN & Clients, 44 percent Help desk facilities, and 43 percent WAN and servers infrastructure.

Medium-sized and small-sized companies are more keen to outsource application development functions while larger companies prefer minimal outsourcing of these functions. 90 percent of small companies prefer to outsource LAN & Clients infrastructure, whereas only 46 percent of the large companies outsource these hardware.

Compared to last year, most companies will keep on outsourcing in the same areas. However, there will be some growth in the amount of outsourcing in each area, as 27 percent companies plan to invest more in data centers, 30 percent in business processes, and 58 percent in applications development.

Outsourcing drivers

The primary objective behind any outsourcing initiative is to reduce costs. And the survey seems to affirm this. Of the total respondents already outsourcing or planning to outsource, nearly 54 percent are focused on the cost benefits.

This is followed by reasons like the need to focus on core competencies (46 percent), access to special expertise (41 percent), and faster delivery (39 percent).

80 percent of small organizations and 54 percent of large organizations wanted to reduce costs with the help of outsourcing. An interesting trend here is that nearly 50 percent of small companies see outsourcing as a convenient way to have access to new technologies, something that large organizations are not worried about.

Given the fast-changing tech dynamics, smaller companies prefer to outsource IT functions with the view of staying ahead of the technology curve. This way they can benefit from the latest technologies without spending a packet in procuring, maintaining and upgrading on these technologies.

Selection of the vendor

While reducing costs is the most important driver for outsourcing, the cost quoted by the outsourcing vendor is not considered to be of high significance.

When it comes to selecting an outsourcing vendor, Technical competence, and Service and support are the top two aspects in the mind of the CIO.

93 percent of the companies insist on the relevant technical competence, and 80 percent look for suitable service and support offerings from the partner.

The cost factor comes a distant third with 67 percent of the CIOs interested in going for the lowest bidder. Also 55 percent of CIOs look at past experiences with the outsourcing partner before finalizing.

Who makes the decision?

Since outsourcing of IT infrastructure is largely a technology-focused area, one would think that the CIO would be the highest authority involved in making the decision to outsource. The survey reports that according to 48 percent of the CIOs, CEOs are also involved in taking the decision to outsource. However, 32 percent indicated that only the CIOs are involved in such decisions.

A rather small number (10 percent) of functional IT Heads, and only 1 percent of functional business heads, are involved in making the outsourcing decision.

In large companies it's mostly the CEOs and CIOs who contribute to make the decision. Only 4 percent of the CFOs are involved in the activity.

Research Snapshots
  • 27 percent of the companies have invested in outsourcing last year. The amount of investments made by companies in the last year compared to that of the next year will remain unchanged.
  • 58 percent of the companies that are outsourcing or making plans to outsource have focused on application development and management, and management outsourcing.
  • 90 percent of small companies prefer to outsource LAN & clients infrastructure, whereas only 46 percent of the large companies outsource these hardware.
  • The primary objective behind any outsourcing initiative is to reduce costs. Nearly 54 percent are focused on the cost benefits.
  • Nearly 50 percent of small companies see outsourcing as a convenient way to access new technologies, something that large organizations are not worried about.
  • When it comes to selecting an outsourcing vendor, 93 percent of the companies look for technical competence and 80 percent want suitable service and support offerings from the partner.
  • According to 48 percent of the CIOs, CEOs are also involved in taking the decision to outsource

NM Suggests
  • Outsource non-core, yet important IT tasks such as developing and maintaining business applications, managing LAN and client workstations, handling customer help desk etc. This will free your IT staff for managing more business-critical issues.
  • It makes sense for medium- and small-sized companies to outsource application development functions as too much customization will not be required. However larger companies may prefer to outsource these functions less as it requires a deeper understanding of the business processes.
  • If data security and privacy isn't an issue, do outsource management of LAN & Clients infrastructure.
  • If certain aspects of infrastructure costs grow exponentially, then it makes sense to outsource that element of the infrastructure.
  • Although the primary objective is to improve cost, do consider other factors like service levels, past experience, reputation, technical competence etc when choosing an outsourcing partner.
  • Do involve the business heads as well as top management when taking the decision to outsource.
 
     
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