Going beyond costs to measuring value

In 2006, Unisys sees business value metrics replacing service level agreements

Outsourcing services will continue to grow in popularity in 2006, dissipating the political haze that has led the public to misunderstand its full benefits and implementation options, say Unisys experts.

"In the last few years outsourcing has been made the focus of a political sideshow - portrayed at best as a way for companies to meet demand for IT services by capitalising on lower labour costs in developing regions of the world, and at worst as a way to employ one set of workers at the expense of another," says Mukul Agrawal, country manager, Unisys India.

"Really, the discussion needs to be about the significant business advantages outsourcing delivers," added Agrawal.

"In 2006, enterprises will finally see through the politics and economic half-truths and realise that outsourcing isn't just global sourcing narrowly applied. They will focus on the business definition of outsourcing: assigning execution of certain tasks to an expert partner, regardless of geographic location, who can deliver demonstrable value to the business."

This will enable all to "clearly see outsourcing?s benefits: breakthrough visibility leading to secure business operations, better quality of service to customers and employees, improved risk management, remarkable operational efficiencies with lower total cost, and maximised IT investment."

Spelling out new success measurements that will drive global sourcing decisions and which will emerge as a key market factor, Unisys said that there will be decline of the SLA (service level agreements) as prime outsourcing success metric.

"Business-value metrics will drive increased global sourcing and complexity in engagements will drive the need," Unisys in its predictions for 2006 noted.

On the decline of the SLA, Agrawal said: "Organisations make substantial investments in management of IT infrastructure and business processes because they understand that outsourcing can deliver significant returns. They must continually demonstrate the relevance of that investment to the business and strategy by measuring the results it yields. SLAs, the traditional yardstick for measuring results, are no longer adequate to that purpose. They are primarily measurements of the vendor's success in executing tasks, not how the provider impacts or furthers the client's business imperatives."

He further said that achieving 99.96 per cent uptime of the client's network is a typical SLA, but as a measurement of business value it's so broad that it becomes nearly meaningless.

"On the other hand, the personal uptime per high-productivity or pivotal employee would be a more meaningful metric, because it measures the kind of uptime that most directly benefits the business."

In 2006 outsourcing performance metrics that are "directly rather than tangentially relevant to business improvement," will be adopted.

To discover the appropriate metrics, according to Agrawal, an enterprise management has to find the linkages among critical business processes and supporting IT infrastructure elements.

Once this is done, the key next step is deciding which would be most beneficial to the organisation to outsource, assigning management responsibility to the appropriate internal or external party, determining the optimal success metric for each and monitoring progress against those agreed-upon business metrics.

Detailing on the aspect of Business-value metrics that will drive increased global sourcing, he said: "In 2006, to capitalise on the combination of educated workforces and lower labour costs and cost of living, enterprises and their services providers will continue to outsource important support tasks to providers in India, Eastern Europe, China, and even certain areas of the US and Canada. Increasingly, though, measurable value to the business, and not just cost containment, will be a key factor in global sourcing."

"An enterprise can send IT support offshore to take advantage of lower labour costs, but if its employees spend more time on the phone per call with support personnel due to language or technology barriers, it hasn't gained any advantage at all from global sourcing. Global sourcing needs to be backed up by a strong business case based on meaningful metrics," highlighted Agrawal.

He added that complexity in engagements will drive the need for a 'manager of managers'. A basic economic reality will continue to drive outsourcing in 2006 and only a relatively few large, multinational companies have the scale to insource management of all their business processes and IT infrastructure.

The personnel and capital costs of wholesale insourcing can be astronomical. Increasingly, both enterprises and government agencies will adopt global sourcing strategies that rely on multisourcing, the use of use both insourced and outsourced resources.

Frequently, enterprises' next-generation multisourcing strategies involve multiple external partners. While retaining internal control and maintenance of its strategic applications, such as those for customer service, a company could outsource management of its IT infrastructure to one partner, its HR processes to another specialist, its procurement and logistics operations to a third provider, and so on. The larger the number of partners, the more value there is in unified, programmatic oversight of their activities, Unisys said.

"Outsourcing specific functions to best-in-class providers makes tremendous strategic and economic sense," noted Agrawal, "but it can create challenges for management if not done adroitly. I see 2006 as a breakthrough year when enterprises begin engaging a 'manager of managers' to oversee and coordinate the activities of all sourcing partners to maximise the business and operational value of their outsourcing engagements."

This doesn't involve just implementing a function in software, "It requires choosing a skilled outsourcing provider to ensure that multiple providers make the appropriate connections, which appropriate benchmarks from all quarters of the engagement are linked and reported, and that conflict is surfaced and resolved right away."

He added that application outsourcing will become more widespread in 2006, but the way enterprises undertake it will be more disciplined. Outsourcing applications can take many forms, from engaging a provider to run the applications in a conventional data centre and perform code maintenance to accessing the applications on a pay-per-use subscription basis from a provider running an IT utility employing a server farm.

To maximise the value of outsourcing strategic applications, enterprises will increasingly take a planned approach, often working with an expert partner, to answer fundamental business questions, such as whether the organisation needs to own the applications, or just the architecture around the applications, or both or neither.

Then they can determine which applications are most strategic, which ones the business will benefit from outsourcing, and what is the best way to outsource each.

"Enterprises will begin to derive as much benefit from planning the way they'll outsource the applications as they will from actually outsourcing them," noted Agrawal.

On the issue of what will spur offshore processing in 2006, Agrawal said: "The 2004 passage of the US Check Clearing for the 21st Century Act (Check 21), which provides a comprehensive framework to dramatically reduce the amount of clearing time for paper checks, led financial-services experts to expect a huge decline in US check volumes in 2005."

"In 2006 I expect what we had initially anticipated for 2005. We'll see a more precipitous decline in check and remittance volumes, driving banks that previously relied on internal processing capabilities to achieve economies of scale, especially by pooling their volumes with those of other banks in check processing utilities," he added.

"American financial institutions will demonstrate greater willingness in 2006 to take advantage of payment processing capabilities outside the US to capitalise on economies of scale and lower costs," predicts Agrawal.

"India has a mature payment processing capability. A lot of US financial institutions and payment processors like the idea of doing something where it's been done successfully before. Eastern Europe especially, but parts of Asia in addition to India, are well positioned to host an increasing amount of offshore payment processing from the US."