Is IT Outsourcing a Dying Concept?

Has the concept of IT outsourcing outlived its effectiveness? KPMG's Cliff Justice says the process that the term was invented to describe has evolved considerably and finding value in IT service providers is taking on new meaning.

By Stephanie Overby
Fri, November 09, 2012

CIO — According to a recent survey by outsourcing analyst firm HfS Research, 63 percent of IT leaders would like to drop the term "outsourcing" to describe the IT services provided to them by third-parties and 68 percent of IT service providers want to do away with the designation.

Some of that can be attributed to the negative connotations associated with the word "outsourcing," particularly on the heels of a presidential campaign that trotted out the practice as a job-destroying boogeyman.

KPMG's Cliff Justice on the Death of IT Outsourcing

But it could also be that the term has outlived its effectiveness. "Like many invented terms, the process it describes has evolved considerably from what it was initially," says Cliff Justice, partner in KPMG's Shared Services and Outsourcing Advisory.

In his report earlier this year, "The Death of Outsourcing," Justice argues that as the use of third-party IT service providers has evolved from a simple "lift-and-shift" back-office cost-cutting exercise to a complex ecosystem of smaller deals, higher expectations and more business-centric services. The way customers and providers think and talk about outsourcing must advance as well.

The low-hanging fruit has been picked. Organizations will find it difficult to rely on their low-cost, low-margin service providers to be in a position to step up with the kind of investment needed to give them additional competitive advantages.

Instead of delineating between insourcing or outsourcing or offshoring, Justice writes that IT leaders should embrace the "extended global enterprise" not a specific model or set delivery structure, but rather a paradigm for delivering business services based on the concepts of end-to-end processes, internal and outsourced service providers, high value services and strong central governance." talked to Justice about the shift taking place in IT services, the inherent inertia on the part of both customers and providers to embrace new models, and the potential winners and losers in a world beyond outsourcing. When did IT outsourcing really start to shift in terms of both structures and expectations and what have been the most significant changes?

Cliff Justice, KPMG: It really started to shift around 2006 to 2007. We are seeing a transition from outsourcing as a commodity that's very price-focused to a service that's much more value-oriented. Companies with the most mature arrangement--the ones I call "Extended Global Enterprises"--have shifted or are shifting to integrating the use of third-parties and managing that integration in a way that promotes their business goals. The result is more innovation, more new product ideas, and more new services.

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