Forrester’s research into outsourcing frequently shows buyers berating providers for failing to innovate. Most recently, Forrester’s Enterprise IT Services Survey, from April 2007, threw up new evidence. Of more than 1,000 IT executives we interviewed, 28 per cent said their outsourcing provider was unable to respond rapidly to changing business needs.

There are two areas of focus that could close this innovation gap and help to alleviate the grumbles.

First, buyers must recognise that outsourcing at its best is rooted in focused innovation. Leading service providers such as HP, Capgemini, IBM, and EDS have to innovate just to meet the demanding cost-reduction expectations of clients. These firms labour to consolidate and rationalise infrastructure, implement strong service management disciplines and processes, and impose structured metrics and measurement on service delivery. This is real value-generating innovation, delivering a more reliable, agile infrastructure, often at substantially reduced cost. But too many stakeholders inside the client do not recognise this innovation because its impact does not by itself provide direct business performance gains.

Customer owners of outsourcing relationships need to address that failure of communications and make sure their colleagues grasp the true value of the services delivered.

Second, buyers of outsourcing must stop wanting to have their cake and eat it. They want to impose a contract that drives the outsourcer to deliver a rigidly commoditised service at a rock-bottom price. Simultaneously they expect the provider to bring all kinds of improbable performance improvements to the business. Service providers compound this problem by promising a raft of improbable inputs from company scientists, research facilities, centres of excellence and the like ­ but allowing the client to studiously ignore such niceties in the hard language of the contract.

Both sides need to break away from this destructive collusion during the negotiation of outsourcing deals. Clients that want innovation built into an outsourcing contract have to directly express this in the contract ­ and be prepared to pay a market price for the added value. Outsourcing providers in turn must clearly represent the various areas of value delivery they offer ­ from commodity desktop services, for example, to business performance consulting ­ and properly represent to the client how to procure those services on appropriate terms.

Too many outsourcing buyers still approach the contracting process as an adversarial contest to be won on all terms. To combat this imbalance, outsourcing advisers such as TPI have begun to talk increasingly of promoting a more win/win-oriented approach to setting up outsourcing relationships.

Forrester can only agree ­ and if the market can act upon this advice, then that might see the first tentative steps taken to lay to rest the old moans about outsourcing’s innovation deficit.

Andrew Parker is vice president and research director at Forrester Research

Computing readers can download Forrester Research reports free of charge at www.forrester.com/computinguk. For more information on Forrester’s Sourcing and Services Forum held on 29-30 November in Nice, visit: www.forrester.com/sourcing2007

Companies that frequently use IT outsourcing fail to co-ordinate well across multiple contracts, meaning that not all their provider relationships pull in one direction.

The outsourcing world has shifted from off-loading all IT to one service provider to taking a more selective sourcing approach. Businesses often outsource various domains, such as desktop services, data centres, network management or support services, to a range of different specialists.

To add to the complexity, the providers selected may vary, such as an international manufacturer that uses three separate desktop services suppliers just to meet its European requirements.

To address this issue, a recent report from Forrester Research sets out a three-step framework to define a more co-ordinated outsourcing approach. Each step should allow firms to move forward in an organised fashion, in alignment with the realities of the IT department and the company’s outsourcing goals.

Step 1: Shortlist only outsourcing models that align with the current IT realities of your firm. Some outsourcing models simply do not fit with existing IT structures and behaviours.

For example, a centralised, global deal with a single service provider will not fit with a highly decentralised, fragmented IT organisation where powerful local IT directors respond to local business leadership.

Similarly, targeting outsourcing to deliver business transformation is not likely to work if your IT organisation focuses mainly on commodity, low-cost IT operation.

Step 2: Evaluate internal IT staffing issues. A significant outsourcing project brings substantial changes in IT staffing. Planners must be clear which skills must be retained and which can move to an external provider. For example, a company whose custom applications deliver a competitive edge will aim to keep the relevant software development group in-house.

A firm that faces difficulty in recruiting the right IT skills in a given geography may choose a capable local outsourcing partner to address the shortfall. The general principle being: choose outsourcing options that help you invest in and retain the IT skills you need internally.

Step 3: Shape the outsourcing approach to meet your IT spending and maturity issues. An IT organisation that shows best-in-class cost benchmarks and operates mature, robust processes, will require a very different strategy from one that falls short in these areas. For example, companies that have poor process maturity in the application development group often struggle to work well with process-centric Indian service providers.

Outsourcing planners’ expectations of external providers must adjust to the realities of IT spending and financial targets set by the business. Equally, the same planners need to consider the required inputs from the outsourcer in relation to growing the maturity and stability of IT delivery – often working with recognised frameworks such as ITIL or CMMI.

Andrew Parker is vice president and research director at Forrester Research. Computing readers can download the Forrester report “Three pragmatic steps to an outsourcing strategy” at www.forrester.com/computinguk. For information on Forrester’s Sourcing and Services Forum in Nice in November, visit www.forrester.com/sourcing2007

A recent Forrester Research study reviewed three years of survey data on large IT outsourcing contracts in Europe. One element of the study compared selective sourcing ­ using multiple specialist service providers to handle various parts of a company’s IT environment ­ with multisourcing ­ a similar approach but with the added element that the user sets up all the service provider contracts in parallel at one time.

European companies regularly use selective sourcing. Between 2004 and 2006, Forrester tracked some 900 large outsourcing contracts. More than 50 of the companies were pursuing a selective sourcing approach, running contracts with two or more providers. A separate Forrester study showed that 84 per cent of large firms pursue a selective sourcing approach to IT outsourcing.
By contrast, multisourcing, as defined here, remains rare. Just nine examples showed up in Forrester’s survey, including Dutch bank ABN Amro, and car firm Renault.

The reasons for multisourcing’s rarity seem obvious: it’s harder and more resource intensive compared with signing a global deal with one provider; and suppliers don’t always encourage this approach. But there is a positive side. For an organisation that needs a comprehensive overhaul of its IT delivery without signing a global, single-provider outsourcing deal, multisourcing offers a way to set up a complete service with a consistent strategy and approach. It opens the door to consistently defined service level agreements (SLAs), and a systematically planned approach to vendor governance and management.

If your company sees a potential benefit from multisourcing, then I have three pieces of advice.

First, involve the right internal stakeholders in planning and defining the project. Get everyone behind the approach. If a key figure, such as the finance director, doesn’t fully support this, you’re lost.

Second, consider using an external adviser for planning and execution. Firms such as TPI and Deloitte have been closely involved in several of the nine multisourcing deals mentioned. These experts can help identify potential pitfalls, sort out vendor realities from marketing blurb, and assist through the complex steps of vendor selection and contract negotiation.

Third, take time to examine the multisourcing credentials of the service providers. Challenge them on issues, such as how they manage common SLAs with other service providers ­ right down to operating with a common configuration management database, and integrating trouble ticketing processes. A few firms, including EDS and Capgemini, have begun to build internal disciplines to co-ordinate better with peers in this way. It pays to work with those who have proven capability.

Andrew Parker is vice president and research director at Forrester Research. His report ‘Outsourcing Providers Need A Strategy Rethink To Address Buyers’ Shift To Multisourcing’ is available to Computing readers free of charge at: www.forrester.com/computinguk