The whys and wherefores of outsourcing

Cost savings, risk reduction, and freeing up internal IT staff – are three of the commonest reasons why companies outsource IT projects.

And while cost savings undoubtedly tops the list, making it the sole focus of any outsourcing initiative may not be a very good idea, as recent research indicates.

Controlling cost

Here’s an interesting fact: 80 per cent of organizations that outsource their customer management operations purely to cut costs will fail to do so. That’s a statistic provided by Stamford, Conn.-based IT research firm Gartner Inc. during its Customer Relationship Summit in March.

And it emphasizes a reality that enterprises – both in the public and private sector – are becoming increasingly aware of.

One of them is Ottawa-based Canada Post.

Cost control was an important factor in Canada Post’s decision to outsource its inventory control, billing and document management processes, according to Philip Gaudette, the organization’s manager for national contracting.

But he is quick to add that there was bit more to it than that.

Ottawa-based Canada Post most recently signed an $80 million outsourcing agreement with Boucherville, Que.-based business process outsourcing firm Realizon Canada.

Gaudette said while the value proposition is indeed around cost savings, it also has a lot to do with improving the logistics and business process efficiencies. Canada Post, he noted, runs one of the largest e-procurement [systems] in North America. The system, he said, links all outlets, in one form or other, enabling them to order online the products they need to support their day-to-day business.”

Businesses need to look beyond just cost considerations and also focus on how to enhance time to market and customer service levels, according to Mohamed Yacoub, president and CEO of Realizon Canada. When these factors also weigh into an outsourcing decision, the business case “become more compelling”, he said.

Realizon handles the warehouse workflow, including inventory, interdepartmental workflow documents, bills of lading, bar-coding for “track and trace” of mail products, and Internet support for Canada Post’s commercial clients. “Canada Post actually doesn’t own any inventory until we physically place an order for it,” Gaudette said. This “just in time” inventory setup saves overhead costs, he added.

Canada Post is constantly reevaluating the viability of outsourcing, Gaudette said. Given the fierce competition in the track-and-trace business, he said, it’s absolutely critical to have precise track and trace numbers on each document. “It makes more sense financially for a business to have a partner provide this type of service.”

So while saving costs is indeed a key driver, business process improvement is the main benefit, he added.

Reducing risk

When it comes to outsourcing, risk can be contentious issue, particularly given that enterprises are essentially handing over control and management of the network to a third party.

But Patrick Watson, CEO for Vancouver-based SplashDot Inc. doesn’t quite see it that way. “It’s about eliminating risk as much as we possibly can. It’s a great thing to be able tell clients the system will always be available.”

SplashDot is an incentive relationship marketing (IRM) firm that provides enterprises with online software products – including interactive contests and loyalty programs – to attract visitors and ultimately convert them to faithful customers. The company has signed a hosted IT environment outsourcing pact with Fusepoint Managed Services Inc. Fusepoint is responsible for the security, availability and redundancy of SplashDot’s network, Watson said.

One big reason why certain organizations choose not to outsource has to do with concerns over loss of control and protection of intellectual property, according to a recent joint research study by CAPS Research and A.T. Kearney Inc.

The study, Outsourcing Strategically for Sustainable Competitive Advantage, suggested that enterprises develop a prescriptive model for strategic outsourcing, and create a systematic process to determine what information to share with the third party.

SplashDot decided that there’s a lower risk in outsourcing the network than in handling it in-house, Watson said. “I think that as more organizations do more with their customers…there’s the question of do you [decide to] control the information and the servers, or do you work with an expert in that field.”

SplashDot recognizes that customer data has to be treated with the same care and attention as money – and has concluded that outsourcing provides the necessary infrastructure to do that, Watson said. It would be hard for the typical organization to set up a similar hosted environment that is as secure, he added. “We don’t see it as giving up control or management because we work as true partners in the process.”

It’s outsourcing arrangement enables SplashDot to turn around and provide a hosted system that its customers use to run contests and loyalty programs.

While SplashDot’s relationship with Fusepoint is outsourcing in one sense, Watson said, “it is a really a true partnership where we can work together to create a bulletproof system.”

Freeing up IT staff

Companies that decide outsourcing is the way to go are still faced with the question of what work they should contract out and what they should accomplish in-house.

According to a 2005 IT Priorities report published by London-Ont.-based InfoTech Research Group Inc., mid-sized organizations, last year, outsourced Web design and application development and maintenance more commonly than IT infrastructure.

Mike Milinkovich, president of Eclipse Foundation notes that while outsourcing may not be for every organization, it is a good cultural fit for his firm.

The Ottawa-based non-profit Eclipse Foundation focuses on creating Java development tools and building support for the open source Eclipse framework.

He said a cross-section of the industry requires good tech support, and can meet this need more economically and flexibly through a good outsourcing deal.

Eclipse Foundation has limited staff resources while supporting more than 100 partner companies and millions of users. “Most of those users interact with the community and the software via the Web site,” Milinkovich said.

Eclipse, last November, entered an outsourcing IT services deal with managed services provider Magma Communications to provide the server co-location and managed services, including server management and monitoring. The firm’s Web infrastructure has been re-designed to scale for growth and ensure high availability for the Eclipse developer community.

“By using managed services we’re able to devote a lot more time and energy to the actual community itself rather than try to juggle a whole bunch of services,” said Denis Roy, Webmaster for Eclipse.

For Eclipse, managing certain IT services in-house just doesn’t make good business sense, Milinkovich added. The outsourcing pact means Magma will handle the grunt work required for day-to-day tasks such as backup and managing the router firewall. “We have constructed a scenario where we can apply our resources to application development instead of systems and management,” Milinkovich said.

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