For best results, businesses should approach information technology (IT) outsourcing and offshoring strategically and not tactically, according to Tom Weakland and Anthony Abbattista. The two spoke on “Implications of Globalization, Offshoring and Outsourcing” Wednesday during the BAI Retail Delivery Conference and Expo.

Weakland is a managing partner in global sourcing practice at Chicago-based Diamond Management and Technology Consultants, Inc. Abbattista is vice president, enterprise technology, strategy and planning, at The Allstate Insurance Company in Northbrook, Ill.

“To date, more people have approached IT tactically rather strategically. When you approach sourcing tactically, you tend to focus on costs or value rather than quality improvement. It’s a short-term focus instead of a long-term,” Weakland said.

For strategic sourcing, “people should look at their business and understand what their revenue goals are, what their aspirations are, and what messages they want to send to their customers,” Weakland said. “Then they should look at global resource capability and decide how best to deploy different types of resources within their organization.”

As for outsourcing solutions providers, “they need to stop selling commoditized products and start selling solutions,” Weakland added.

Abbattista, citing the experience of Allstate, said the strategic approach effectively recognizes the strengths and weaknesses of employee, consultant and onshore/offshore resources. Then, tasks are assigned appropriately to meet the company’s goals, he said.

Allstate, for example, took a look at its financial operations in field accounting and decided “to outsource the mundane tasks and keep the problem resolution and things close to the customer with us,” Abbattista said.

Since 1999, Allstate has outsourced some IT maintenance and back office processing to northern Ireland and India, Abbattista said.

Abbattista advised against outsourcing decisions made one at a time and based only on saving costs or time. A company should review how outsourcing impacts all the operations of the company before making key decisions, he said.

Weakland reported on the findings of Diamond’s fourth annual global IT outsourcing survey. For 2006, 153 buyers and 189 providers from around the world participated in the survey, which was augmented by follow-up interviews of dozens of outsourcing buyers and providers, according to Weakland.

The survey found that both onshore and offshore IT outsourcing is still growing robustly, but at a slower pace than last year. The number of companies planning to increase their level of outsourcing has declined from around 86% to 64% in the last two years, while those planning to increase onshore outsourcing has fallen from 64% to about 50%.

Some companies are unhappy with the results of their outsourcing, according to Weakland. For example, the survey found that 9% of IT buyers are planning to reduce their level of offshore outsourcing, while 8% plan to reduce onshore outsourcing.

The problem stems from exaggerated expectations going into the arrangements, Weakland said. Companies expected to save 50% to 60% on costs, based on a comparison of in-house and outside labor costs only.

With experience, companies have learned about “complexity, overhead and communication costs, and ramp-up time and all the hidden transaction costs,” Weakland said. Factoring in all those costs, the savings are closer to 15% to 25%, he added.

In 2004, 21% of companies said they had “abnormally terminated” at least one outsourcing contract in the prior year. That rose to 51% in 2005 and remains high at 47% in the 2006 survey.

Attitudes toward IT outsourcing have changed significantly since Diamond did its first survey four years ago, according to Weakland. “In 2002, when people talked about outsourcing, they talked specifically about cost reduction and taking advantage of wage arbitrage. Now, while that’s still really important, we hear people talking about outsourcing to meet variable capacity needs,” he said.

For example, he said, a company might hire 50 developers from outside the firm to get an IT project done over an 18-month period. When the project ends, so do the costs.

More Articles in This Issue

» DISTINCTIVENESS FOR LONG-TERM GROWTH
With free checking so easy to come by nowadays, banks have upped the ante to attract deposits. But while incentives such as George Foreman Grills and iPods may help in the short term, the only way to sustain long-term growth is through institutional distinctiveness, according to marketing experts at BAI’s Retail Delivery Conference & Expo.  »more

» REWARDS PROGRAMS FOR DEBIT CARDS
Rewards programs helped rev up credit card usage; can they do the same for debit cards? Marketing experts at BAI’s Retail Delivery Conference & Expo say the initial signs appear favorable.  »more

» CREATING THE ENTHUSIASTIC EMPLOYEE
Developing a strong corporate culture and empowering employees to do their job well are two key ingredients to inspiring “enthusiastic employees,” according to Douglas A. Klein, president of Sirota Survey Intelligence LLC.  »more

» BAI Home
» BAI Banking Strategies Online
   To subscribe/renew
   Articles archives
   To advertise
» BAI Conferences & Events
» BAI Education & Training
» BAI Research & Benchmarking
» Resource Directory