Has outsourcing lost its strategic relevance?

For more than 20 years, outsourcing and global delivery were at or near the top of the CIO to-do list. Strategically, outsourcing IT services allowed an enterprise to gain the essential capabilities it needed to endure the dramatic shifts of the last two decades – remediating billions of lines of code to support Y2K, creating first-generation websites, supporting the growth of the dotcom boom, optimizing the supply chain through massive ERP efforts and riding the giant digital transformation wave.

Somewhere along this journey, global delivery of IT services grew less important and less strategic. Cost savings became the key criteria to measure success and service providers commoditized their offerings to meet market demand. But at what cost? Industry vets would likely point to a lack of innovation, poor delivery or the recent trend to repatriate services. Indeed, the desire for continued cost cutting has made functional CIOs and global IT service providers less and less relevant.

The signs of this shift are easy to spot. Ten years ago, outsourcing experts developed vendor management offices to gather internal experts to carefully select suppliers and renegotiate agreements, requiring little involvement from senior IT executives. Today, in conversations about cloud, cybersecurity, agility, automation, IT-business alignment or the slew of other issues CIOs face, strategic sourcing isn’t even mentioned.

CIO.com’s State of the CIO 2017 survey crystalizes the issue. By asking CIOs how they spend their time on a range of activities – including what they consider to be core, transformation-related, functional and strategic – the survey exposes IT’s shifting priorities. In 2010, the State the CIO survey found CIOs were spending 34 percent of their time on functional activities and 53 percent modernizing applications, with a large number of CIOs using strategic outsourcing to achieve their goals.  

In the 2017 survey, the definition of functional activities includes cost control, vendor negotiations, crisis management and operational improvements. What used to be strategic decisions about achieving cost control and developing a global delivery model are now considered functional activities– and CIOs spend less than 20 percent of their time on them. 

Does this mean outsourcing is no longer strategic? And, more importantly, does it matter? To be sure, first-generation outsourcing deals are a dying species. The icons that formed the industry (IBM, HP, EDS, CSC) are completely different companies today, with HP and the remnants of EDS combining with CSC to form DXC Technology in what it hopes will become like the powerhouse of years past. 

Second-generation deals also have run their course. The rise of global delivery saw massive growth in the Indian and Latin American IT services markets and, for the most part, fulfilled the talent gaps in the industry and drove costs down. We didn’t always see innovation, but the terms and practices of the IT industry became highly standardized to manage processes and output. While the benefits of these frameworks are debatable, there is no arguing that they brought scale and discipline to IT organizations around the world.

But, over time, even while enterprises have reaped the substantial financial benefits of labor arbitrage, they’ve grown increasingly dissatisfied. What once was considered strategic has been reduced to renegotiating agreements – simply recalculating the onsite/offshore ratios, negotiating better rates, and perhaps tweaking the SLAs to better reflect outcomes. No wonder CIOs don’t want to spend time with vendors!

Meanwhile, today’s technical and IT challenges are more complex than ever. The need for speed, agility and global connectivity has never been greater. In short, outsourcing needs to be strategically relevant once again. Enterprises now more than ever need to leverage the global business models they’ve built over the last 20 years and the digital, economic and social ecosystems that support them. More importantly, enterprises need a global workforce that will transform IT from a back-office function to an engine of innovation and accelerated growth. 

So how does outsourcing regain its strategic position? First, the conversation can’t be about outsourcing. It must be about transforming and enabling organizations to meet whatever challenges they face. We’re operating in a new reality in which enterprises, service providers, start-ups and industry giants like Microsoft, Amazon and Google make up a complex ecosystem that requires new alliances and new ways of operating. Second, enterprises must pick the practices that best meet their needs from the latest new work methods – whether it be Lean, Scrum, Scalable Agile Framework (SAFE), Kanban and DevOps – and redefine how they compete in a faster, more demanding world. 

Making outsourcing strategic again means creating sourcing relationships that reflect new ways of doing business – cultivating partnerships that help enterprises anticipate and prepare for the realities of an uncertain and continuously evolving future.