Where is outsourcing heading?

Outsourcing is in a state of flux. Tony Virdi says the new industrialised model that will emerge will offer plenty of advantages but companies may have to look elsewhere for ways of gaining an edge over rivals.

The way manufacturing has become industrialised provides a number of parallels with today's IT industry. For example, the manufacturing of cars has evolved so that suppliers' specialisations are maximised. Each supplier delivers their particular component to the final supplier or integrator, who pieces everything together.

The cost of each component is completely transparent as is the business outcome - the car itself.

The IT industry is moving in the same direction. Outsourcing is becoming less tailored to individual organisations and providers are offering more standardised plug-and-play services.

Industrialisation is reconstituting every aspect of IT services. Analyst firm Gartner describes this industrialisation as the standardisation of IT services through pre-designed and pre-configured systems that are highly automated, repeatable, scalable and reliable and meet the needs of many organisations.

Business-critical and life-critical IT services cannot move forward if they continue to be produced in the current artisan style. End users commonly complain about high failure rates for IT projects, inflexibility of suppliers, high rates of renegotiation of contracts and an absence of structured IT delivery. Industrialisation will bring standards that should eradicate such complaints.

Industrialisation does have many positives. These include:

• Industrialisation will componentise the whole delivery model of IT. This model with specialised competence centres will take advantage of the specialisations of different outsourcing locations. This follows on from the multi-shoring outsourcing model, in which an end user chooses a number of different suppliers, often with varying delivery capabilities in different locations, to complete a single outsourced project.
• Industrialisation will componentise the whole delivery model of IT. This model with specialised competence centres will take advantage of the specialisations of different outsourcing locations. This follows on from the multi-shoring outsourcing model, in which an end user chooses a number of different suppliers, often with varying delivery capabilities in different locations, to complete a single outsourced project.
• Greater open standards will emerge, ensuring that suppliers know how each component fits in and their delivery specifications.
• Industrialisation will bring greater benchmarks to the IT industry. At the moment there are no common delivery standards, or specific industry measurements that dictate quality and quantity levels. If suppliers all deliver a more standardised product, end users can benchmark cost and quality much more easily.
• The customer experience will become more predictable and the business outcome will therefore be more measurable from the start.
• Development costs will be lowered and these cost savings will be passed onto the end user.

However, industrialisation is not all positive. Companies have to be wary as there are some disadvantages.

Where high-end niche products are concerned, companies may stick with a more customised model. Systems that are more complicated and have more intricate requirements are almost certain to need an IT solution that needs to be tailored.

The IT industry still does not have sufficient and consistent standards. On the other hand, standardised solutions can provide the building blocks on which a customised solution can be developed. This is the whole philosophy behind service-orient architecture.

Even a project that is incredibly complex might be able to use an industrialised solution at the base with certain customised elements layered on top. This is also an opportunity for suppliers to develop a niche service that can differentiate them from the more standardised market.

The other problem with standardisation is that technology is always changing. Just look at the IT industry now compared with 10 years ago. A standard solution for all IT needs may work now - but not in 10 years. So standardised solutions need to be sufficiently open, flexible, configurable and adaptable to constant market changes.

How will these changes affect the outsourcing market as a whole? Initially, standardisation will mean one level of competitive advantage is diminished. Bringing in a supplier to put in place a costly high-level, high-quality CRM platform might have previously yielded a direct ROI. Standardisation will oblige companies to find other ways of gaining an edge over rivals.

The most direct and simplistic of these is through customer service. This is particularly true in the banking sector where customer service is already a huge differentiator. The standardisation of IT services will mean the customer service, rather than the IT, becomes the key differentiator.

In theory, industrialisation should open up a number of new offshoring locations that could deliver a good, standardised service at a lower cost than their established rivals. This would have a knock-on, negative effect on providers in traditional outsourcing locations such as India.

But the practice does not quite match the theory. In reality there are barriers to industrialisation - service delivery still needs to be led by high-quality delivery methods, a highly automated infrastructure and a product that is consistently beyond the quality level of some emerging offshoring destinations.

On the other hand, emerging offshore entrants that do have the skills and infrastructure can now compete on the international stage as benchmarks become more transparent.

As before, innovation will be key to prolonged success in outsourcing. But innovation of processes and commercial arrangements are becoming increasingly important.

As industrialisation moves into outsourcing, companies will continue to operate a sourcing model in which innovation-oriented tasks with higher user interaction are conducted onshore and lower level, process-driven, automatable tasks mainly go offshore. This will create an industrialised delivery model that could be much more joined up and which relies on global capabilities.

Tony Virdi is the director of the National Outsourcing Association.