Many enterprises turn to external service providers for application-related services. Forrester Research surveys show that between one- fifth and one-third of large companies in the US and Europe use external service providers for each of a number of categories of application services. Established services include staff augmentation for software development projects, application outsourcing, maintenance and support, testing and quality assurance, and newer forms of provision such as software-as-a-service. Forrester estimates the European market for these services at more than $40bn (£32bn) in 2008.

Too many companies focus on the time and effort involved in delivering these services, rather than the outcomes required, when negotiating contracts with providers. Worse still, the cost or price benchmark is too often the most important yardstick for the initial selection of a service provider. These numbers have their uses, of course, but by themselves they give very little indication of the value for money achieved.

One of my colleagues, Bill Martorelli, has recently investigated the potential benefits to companies from a more outcome-led approach to negotiating. He calls this the managed outcome model, and describes it as “an application development and/or maintenance relationship based on defined outcomes and priced on a fixed-bid basis”. This relies on defining the service relationship in terms of deliverables, service levels, and price, rather than according to the number of resource hours or days committed.

Enterprises stand to reap significant benefit from transferring more work to the managed outcome model. Payoffs include a one-off cost/benefit boost from moving work across from internal processes to those of the service provider.

Additional advantages may include more effective knowledge retention through the provider’s more industrialised knowledge systems, avoidance of lengthy and challenging negotiations over appropriate levels of effort under time-and-materials contracts, and a more defined approach to innovation and business value delivery through building these goals into the expectations placed on the service provider.

Of course, this change of approach involves challenges, too. Not least of these will be winning the internal debate inside the buyer company about loss of control or increased risk from handing over day-to-day service management to the provider. What’s more, some internal stakeholders may not find the benefits from the changed approach so obvious. And, of course, the internal change management  involved in the transition from one approach to the other for the buyer company can be tough to execute on a day-by-day basis.

So where should companies considering this transition make a start? Forrester’s research indicates that large opportunities ¬ like a major application development project ¬ work best. For the provider this means more scale of work, which makes it worthwhile for the supplier to take on the risk of working on a fixed-price basis. For the client, it means more potential cost savings.

Martorelli also recommends that buyer companies should favour opportunities that can be well specified, and where historical data exists. It may seem obvious, but in practice too few firms embark on a service engagement with a clear set of outcomes defined upfront. If it is possible to specify the requirements clearly, then the chances of a managed outcome approach succeeding are that much higher.

Please visit www.forrester.com/computinguk where several key studies on this topic are available to Computing readers free of charge.

Andrew Parker is research director at analyst Forrester Research

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