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the Sourcing of IT Services

The 'Buy vs. Make' decision is probably one of the moste prominent decisions in IT Portfolio management. First of all I'd like to state that the answer completely depends on the rol of IT in the organization and the perception on the added value of IT.

Why do we want to Source IT Services ?

The primary reason for not wanting to provide the IT Services ourselves is in the availability of the required Human Resources with the appropriate competencies. Providing IT Services is a laborious activity that requires a hughe investment in continuous education and training of individuals. At the introduction of new technologies the competencies to exploit them are scarce and expensive. It takes at least 1 year investment in training and education before these technologies became available to your organization.

Sourcing 02The sourcing objective is also related to the technology life cycle.:
  • the main objective for sourcing IT services based on emerging technologies is in the availability of this technology to your organization. This can be such a competitieve advantage that you don't want to wait for the education and training of your onwn staff.
  • for the mature technologies the main objective in sourcing IT Services is in the expectation of cost savings due to econonies of scale that can be realized easier by an external IT Service Provider.
  • IT Services based on 'outdated / legacy' technologies required competencies that are scarce again. The own staff prefers to work with the latest technologies available.

What does an IT Sourcing Strategy look like?
Sourcing 05In todays reality there are various types of sourcing available and implemented. To clarify this I will make use of the IT Portfolio Management Grid.

A frequent type of Sourcing of IT Services is where the 'Purchasing Department' of your organization wants to achieve a certain level of competition using a mix of IT Service Providers.

In NO WAY this should be called 'Strategic Partnerships' although both the Service Provider and the Purchasing department prefer to use this term.

This looks like an adequate strategy during contract negotiations, but in the end it becomes clear that the only objective of both partners is to make as much money as possible (which in it self is not bad at all) and there will always be conflicts.

We have to dig a little deeper to prevent such situations.

Eventually there are 3 main types of IT Sourcing, that all three have a different impact on your IT Service Provisioning in the future and the size of the 'remaining' IT department in your organization.

1. Realizing IT Cost Savings.
Sourcing 03The main objective of Sourcing IT Services is in cost savings based on the expectation that the external IT Services Provider can realize economies of scale easier than you can. This type of sourcing os often seen in the provisioning of IT Infrastructure Services.

Some remarks on this type of sourcing:
  • is this wise for IT Based offerings and Mission Critical IT ? In this case the IT Service has a direct impact on the 'Business bottom line' and the Business Risk.
  • the realization of cost savings can only becaome a reality when you get rid of your own IT infrastructure. A common type of agreement called  'Managed services'  can only lead to cost savings on IT Competencies and it is questionalble whether the external provider can realy provide the services cheaper.
  • on Application services and Value added services we usually deal with the outsourcing of development and implementation projects and research engagements. Sourcing Application Services will always be limited to a certain application. Again the scarcity of there competencies in your own organization will be the driver here.
  • in all cases the internal IT department will not drastically downsize, because we still want to stay in control of the architecture that keeps everything working together.

2. Availability of new functionality to the Business.
Sourcing 01Doelstelling is het sneller ter beschikking krijgen van nieuwe functionaliteit die een directe impact heeft op het bedrijfsresultaat. Deze vorm komt vooral voor bij bedrijven die naast hun normale leveringskanaal een webshop opzetten. Ook het gebruik van administratieve toepassingen 'in de cloud' behoort tot deze vorm van uitbesteding. In dat geval gaat het om kostenbesparingen in de business.

Remarks on this type of sourcing:
  • this type of sourcing confilcts with the preevious one. You can not have both types within one organization. That is why e.g. webshops are often organized in a separate organization.
  • the impact on the IT architecture is significant here. You can not stay 'in control of the IT architecture' because part of it is outsourced.
  • this requires at least an intense cooperation with the external Service Provider to realize flexibility in the IT architecture which leads more to higher IT cost than IT cost savings.

Sourcing 04

An additional problem with this type of sourcing is in 'Service Life Cycle Management'.  The various components of an IT Service all have their own life cycle. This means that the technologies involved are aging on different moments in time.

When you want to stay 'in control' of the IT Architecture, this will lead to very complex contracts and lots of communications between your IT department and the external Service Provider.

3. Strategic partnerships.
My first experiences with outsourcing was in AT&T Networks Systems. In the 90's of last century a deal was crafted on the golf course by the CEO of AT&T Networks Systems and the CEO of IBM Global Services. They agreed upon the price and the duration of 'Strategic Outsourcing' and that was all. I participated in the team that had to 'fill in the details'. My responsibilily was limited to the IT Service Provisioning in the EMEA region (Europe, Middle-East and Africa)'. In the end it came down to IBM buying all the equipment and hiring all staff to provide services as agreed upon. In Europe we allready had sourced part of the IT activity (type 1) to another provider so it was a little more complex than expected.

Sourcing 06

In order to make it all work we used the spread in competencies and the technology life cycle stages:

The result was focused on:
  • staying in control on the IT architecture by the internal IT department.
  • the smallest internal IT department possible.
  • a clear spread of the roles of the internal IT department and the strategic partner.
In the end this wasn't so bad at all. I also have lots of experience with both types 1 and 2. In all cases this wasn't satisfactory for both partners.

TRUST is the biggest challenge in (out-)Sourcing. Starting at the toplevel management of both partners. Trust oozing out to everybody involved in the realisation of the deal. Both parties must be at ease with the other party's benefits from the deal. So it is questionable whether the Purchasing Department should be involved.