Outsourcing to gain more popularity in 2006: Unisys

Outsourcing to gain more popularity in 2006: Unisys

12/20/2005 3:15:59 PM IST

Outsourcing services will continue to grow in popularity in 2006, dissipating the political haze that has led the public to misunderstand its full benefits and implementation options, said Unisys experts.

They made the following predictions for the coming year:

* Decline of the SLA as prime outsourcing success metric
* Business-value metrics will drive increased global sourcing
* Complexity in engagements will drive the need for a “manager of managers”
* A planned approach will boost application outsourcing
* Belated decline in check volumes will drive payments BPO and spur offshore processing

“In the last few years outsourcing has been made the focus of a political sideshow portrayed at best as a way for companies to meet demand for IT services by capitalizing on lower labor costs in developing regions of the world, and at worst as a way to employ one set of workers at the expense of another,” said, Mukul Agrawal, Country Manager, Unisys India.

“Really, the discussion needs to be about the significant business advantages outsourcing delivers,” continues Mukul. “In 2006, enterprises will finally see through the politics and economic half-truths and realize that outsourcing isn’t just global sourcing narrowly applied. They will focus on the business definition of outsourcing: assigning execution of certain tasks to an expert partner, regardless of geographic location, who can deliver demonstrable value to the business. And they will clearly see outsourcing’s benefits: breakthrough visibility leading to secure business operations, better quality of service to customers and employees, improved risk management, remarkable operational efficiencies with lower total cost, and maximized IT investment.”

Decline of the SLA as prime outsourcing success metric

Organizations make substantial investments in management of IT infrastructure and business processes because they understand that outsourcing can deliver significant returns. They must continually demonstrate the relevance of that investment to the business and strategy by measuring the results it yields. Service level agreements, or SLAs – the traditional yardstick for measuring results – are no longer adequate to that purpose. They are primarily measurements of the vendor’s success in executing tasks, not how the provider impacts or furthers the client’s business imperatives.

“Achieving 99.96 percent uptime of the client’s network is a typical SLA,” says Mukul, “but as a measurement of business value it’s so broad that it becomes nearly meaningless. On the other hand, the personal uptime per high-productivity or pivotal employee would be a more meaningful metric, because it measures the kind of uptime that most directly benefits the business. I believe that in 2006 we’ll see wholesale recognition and adoption by enterprises everywhere of outsourcing performance metrics that are directly rather than tangentially relevant to business improvement.”

The key to discovering the appropriate metrics for the organization, according to Mukul, is gaining visibility into the linkages among critical business processes and supporting IT infrastructure elements. Once enterprise management has discerned those, the key next step is deciding which would be most beneficial to the organization to outsource, assigning management responsibility to the appropriate internal or external party, determining the optimal success metric for each and monitoring progress against those agreed-upon business metrics.

Business-value metrics will drive increased global sourcing

In 2006, to capitalize on the combination of educated workforces and lower labor costs and cost of living, enterprises and their services providers will continue to outsource important support tasks to providers in India, Eastern Europe, China, and even certain areas of the US and Canada. Increasingly, though, measurable value to the business, and not just cost containment, will be a key factor in global sourcing. “An enterprise can send IT support offshore to take advantage of lower labor costs, but if its employees spend more time on the phone per call with support personnel due to language or technology barriers, it hasn’t gained any advantage at all from global sourcing, “said Mukul. “Global sourcing needs to be backed up by a strong business case based on meaningful metrics.”

Complexity in engagements will drive the need for a “manager of managers”

A basic economic reality will continue to drive outsourcing in 2006, says Mukul: Only a relatively few large, multinational companies have the scale to insource management of all their business processes and IT infrastructure. The personnel and capital costs of wholesale insourcing can be astronomical. Increasingly, both enterprises and government agencies will adopt global sourcing strategies that rely on “multisourcing” – the use of use both insourced and outsourced resources.

Frequently, enterprises’ next-generation multisourcing strategies involve multiple external partners. While retaining internal control and maintenance of its strategic applications such as those for customer service a company could outsource management of its IT infrastructure to one partner, its HR processes to another specialist, its procurement and logistics operations to a third provider, and so on.

The larger the number of partners, the more value there is in unified, programmatic oversight of their activities. “Outsourcing specific functions to best-in-class providers makes tremendous strategic and economic sense,” said, Mukul, “but it can create challenges for management if not done adroitly. I see 2006 as a breakthrough year when enterprises begin engaging a ‘manager of managers’ to oversee and coordinate the activities of all sourcing partners to maximize the business and operational value of their outsourcing engagements. This doesn’t involve just implementing a function in software. It requires choosing a skilled outsourcing provider to ensure that multiple providers make the appropriate connections, which appropriate benchmarks from all quarters of the engagement are linked and reported, and that conflict is surfaced and resolved right away.”

A planned approach will boost application outsourcing

Application outsourcing will become more widespread in 2006 but the way enterprises undertake it will be more disciplined. Outsourcing applications can take many forms, from engaging a provider to run the applications in a conventional data center and perform code maintenance to accessing the applications on a pay-per-use subscription basis from a provider running an IT utility employing a server farm. To maximize the value of outsourcing strategic applications, enterprises will increasingly take a planned approach – often working with an expert partner to answer fundamental business questions, such as whether the organization needs to own the applications, or just the architecture around the applications, or both or neither. Then they can determine which applications are most strategic, which ones the business will benefit from outsourcing, and what is the best way to outsource each. “Enterprises will begin to derive as much benefit from planning the way they’ll outsource the applications as they will from actually outsourcing them,” said, Mukul.

Belated decline in check volumes will drive payments BPO and spur offshore processing

The 2004 passage of the U.S. Check Clearing for the 21st Century Act (Check 21) which provides a comprehensive framework to dramatically reduce the amount of clearing time for paper checks – led financial-services experts to expect a huge decline in US check volumes in 2005. They anticipated that banks and payment processors would lose economies of scale and see increasing costs per-transaction. To stave off that erosion, many industry experts predicted, banks would aggregate volumes for processing. But none of that happened as quickly as anticipated. “In 2004, the number of non-check payments exceeded those based on checks for the first time in history,” said Mukul, “The industry anticipated a 25 percent decrease in US check volumes in 2005, but it really came in at only 5 or 10 percent as consumer migration to digital forms of payment failed to accelerate as anticipated.” “In 2006 I expect what we had initially anticipated for 2005. We’ll see a more precipitous decline in check and remittance volumes, driving banks that previously relied on internal processing capabilities to achieve economies of scale – especially by pooling their volumes with those of other banks in check processing utilities.”

“American financial institutions will demonstrate greater willingness in 2006 to take advantage of payment processing capabilities outside the US to capitalize on economies of scale and lower costs,” predicts, Mukul. “India has a mature payment processing capability. A lot of US financial institutions and payment processors like the idea of doing something where it’s been done successfully before. Eastern Europe especially, but parts of Asia in addition to India, are well positioned to host an increasing amount of offshore payment processing from the US.”