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Outsourcing and Contingent Labor: CIOs look beyond cost savings towards gaining skills and flexibility

As IT organizations transform rapidly to a digital model through the use of cloud and Big Data, the practice of outsourcing is shifting, too.

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As IT organizations transform rapidly to a digital model through the use of cloud and Big Data, the practice of outsourcing is shifting, too.

On the one hand, outsourcing is booming: Half of CIOs (50 percent) will increase their investment in outsourcing this year, up 4 percent from 2015, according to the 2016 Harvey Nash/KPMG CIO Survey, The Creative CIO.  And in the last five years the use of contingent workers has grown by 25 percent, while the number of IT leaders using flexible contingent labor for more than half of their technology team has grown. 

At the same time, the traditional view of outsourcing is also changing. Outsourcing relationships have typically been used as a lever to reduce operating costs. However, these days more IT leaders are looking at outsourcing as a means to access needed skills and capabilities in a constantly-evolving digital world, as opposed to simply a way to cut down on costs. This comes as no surprise, as The Creative CIO found that almost two-thirds (65 percent) of IT leaders believe a lack of talent in areas such as data analytics and enterprise architecture will slow down their pace of change, up 10 percent over the past 12 months.                 

Around half of IT leaders see outsourcing primarily as a tool to free up resources to focus on the core business, up from 46 percent in 2015, The Creative CIO revealed. In addition, with a serious technology skills shortage, 45 percent of IT leaders also outsource to gain access to skills not available in-house, up from 41 percent last year; while the “save money” outsourcing rationale has stayed static, with 42 percent saying this is a main reason.

The Creative CIO also found that CIOs are exploring ways of creating innovative methods of working. That is especially true in the world of outsourcing: As revenue-generating projects move front and center, the contingent labor force is seen as a way to gain agility and flexibility, as well as a fast way to get workers on board.                      

Organizations focus on outsourcing for “make money” projects

Outsourcing has increasingly become about focusing on top-line spend based on larger strategies as opposed to operations spend, says Charles Arnold, principal at KPMG. “Save money” projects, he explains, have typically been about long-term operational issues such as running core data centers more cheaply or handling provisioning over multiple years. IT is increasingly focused on driving capabilities and with strategic projects that make money, rather than executing tasks that save money, he says.

Companies moving to cloud-enabled, virtual, multi-channel concepts, and away from legacy technology solutions drives the outsourcing trend. “Companies need to enable these platforms for growth — this is a required shift,” says Arnold, adding that doing so allows companies to engage in the projects that take advantage of new digital capabilities.  For those projects, outsourcing by hiring contingent labor works very well. “This is where there is a dramatic increase in hiring contingent workers,” says Arnold.

“Make money” projects enabled by new digital capabilities could involve building new tools that don’t yet exist, based on larger digital strategies related to omnichannel or increased engagement. For example, a life science company’s end goal might be to allow patients to order prescription refills directly through the company rather than through a drugstore chain. The tactical project would be to build a smartphone app that allows patients to automatically refill their prescriptions directly. 

“We’re not talking about long-term, keep the lights on work, which traditional outsourcing might address,” says Arnold. “This is a more strategic build, but in a singular project rather than as an ongoing operation.” Today’s CIOs, particularly ones that are top-line focused, are now looking to drive digital strategy and build the technical architecture that enables these projects. 

Because these shorter-term projects turn more rapidly, companies can innovate using all kinds of labor services, including contingent workers. “The bulk of managed services agreements in recent years have focused on keeping whatever you’re already doing running,” says Arnold, “and saving money through traditional outsourcing was the play.” Now, he explains, there can be more flexibility — whether a company chooses a project-based consultant, a third-party contractor or a large-scale outsourcing provider.

The best outsourcing relationships blend cost savings and top-line results

Of course the best of both worlds is a well-structured agreement where labor resources for a project-based engagement come from the same managed service provider as the company’s traditional outsourcing efforts, but the behavior becomes very different in a project-based environment, Arnold emphasizes.

“It is critical to recognize the different ‘flavors’ of engagement with your provider.  The type of relationships you have with their resources may differ for large-scale managed service outcomes vs project-based, singular deployments.” Either way, it’s about helping the company operate in an efficient and effective manner. 

The organizations that succeed most with outsourcing are those that figure out how to blend the foundational efforts of running systems and creating platforms for innovative and creative work — that not only keeps costs down but also enables top-line results. According to The Creative CIO, today’s CIOs are under increasing pressure to help their firms become more agile, global and digital — delivering value but also growing profitably and keeping costs in line.

“The best outsourcing transactions enable both of these areas, whether they are all done in one service relationship or in a variety of partnerships,” says Arnold. “The question is how to architect your relationships so that you can get the best of both? You need to pick the right partners that can save you money and enable the efforts that drive toward making money,” he says.

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