Recently I had an opportunity to talk with Larry Calabro, a principal at Deloitte Consulting LLP, the consulting group of Deloitte LP, the audit, consulting, financial advisory, risk management and tax services firm. We talked about application outsourcing trends to watch for in 2011.
Calabro has some great insights. For starters, he agrees that there may be some contraction in application outsourcing – an area within outsourcing that for a few years pre-recession was growing faster than others. But Calabro says that contraction is likely due to the shift away from those single-sourced mega-deals, which he calls the” big lift and shift of the IT department to one outsourcer.” He says more companies are re-categorizing and are even bringing some application work back in-house. Nonetheless, Calabro says the application outsourcing market has tremendous opportunity.
You can’t talk about 2011 without talking about the cloud. I wrote a bit about how cloud computing is affecting the outsourcing market here. CIO editor Stephanie Overby wrote this fantastic article, a must-read in my opinion. Anyway, back to Calabro. He says the cloud has the opportunity to fundamentally change the way services are rendered from a supplier. “It will make it easier to obtain services. Of course there will be challenges with consistency, but overall the cloud is exciting because it will create new opportunities.”
Perhaps the trend with the greatest impact is the shift in focus from outsourcing costs to business returns. Instead of delivering and pricing services based on the time the projects take, the model will focus on a return on investment (ROI).“I see the trend ultimately being driven by ROI,” Calabro says. “IT projects, or IT work – as glamorous as it may have been at one time – still has some of the worst ROI.” Because of that, Calabro says outsourcing will more and more be based on the outcome the provider can create for the client, and the cloud will become the vehicle for contracting, accepting and receiving those outcome-based services.
Those services will be managed and measured against business- and service-level metrics, and that in turn will force application outsourcing providers to do more than just provide cheap labor. “Everything is on a sunset path, the day after it gets implemented, and in reality the business case probably didn’t get 60 percent of its value,” Calabro says. “Who is going to ensure that the project gets the value?” He says outsourcing providers need to have employees that are not only affordable and good technologists, but also have “business acumen, good communications skills, and can drive processes around performance.”
Of course, the catch is that price is still king, Calabro adds. “In general, clients will buy on price and then price and then quality, and then risk and then value. In that order,” he says. “The key for providers is, ‘how do you get within 10-15 percent of the lowest bidders, and then still provide all those other things?”
Deloitte Consulting has adapted its application outsourcing model to address these issues. For each project, performance management metrics are established and service levels are set, and the team is measured against these. It’s important to note that these service levels aren’t just about uptime and response time; instead, they are focused on what the business is achieving.
Calabro offers these suggestions for companies entering into, or expanding, their application outsourcing initiatives:
1. Know what it is you are trying to achieve, because that will dictate the way you structure the work and from whom you buy your services. “If I want to spend all my time managing the lowest-cost labor pool, that is a different buy than if I want to free up the most important people in my organization to do more important projects and to innovate.”
2. Get clear objectives from the lines of business, and know who your customers are.
3. Make sure you ask questions about the outsourcing provider’s global delivery model, because at some point, you may need that expertise.