Chief Executive Officer, Lexel Systems
As a CEO I get to learn from the experience of a broad number of customers and get to see the results of both good and bad IT strategy and practice.
It is surprising for small and medium size business, even up to and beyond 1000 staff, how often customer practices are frankly business immature and expose the business to risk, cost or inefficiency. Then the next meeting I’ll see a customer that is very mature and has very well defined IT strategy and practices that align and enable the customer’s growth. One question that comes up frequently in the formation of the strategy is what could and should be insourced versus what could and should be outsourced or out-tasked, and the implications of this?
Where to Outsource?
Many years ago a very experienced CIO outlined to me his golden rule and this is something which I held onto and it has proven the test of time. The simple rule is “Outsource commodity services, insource proprietary or strategic services”. Let’s explore this in a little more detail.
The first part of the rule says ‘Outsource commodity services’. Where there is a service where you’ll never obtain scale of benefits, relative to an outsource provider, a service which is the same for all companies and industries, and a service that doesn’t add strategic value to your business, then you should consider outsourcing it. For example, addressing the increasing risk related to cyber-security, patching of your PC’s and Servers is critical but is actually a commodity service. You could have your own team member assigned to perform this service, but the reality is that these individuals will never get as good as, as efficient or have the quality, maturity and robustness of delivery than an outsourced provider will. An outsource provider is likely to be doing 100 or 1000 times more patching than you would and has the scale, experience, resources, tools and capability to deliver the best outcome. This is an example of a no brainer that should be outsourced.
The next part says “Insource proprietary or strategic services”. Proprietary services are what they say, proprietary to your business. They would be harder for an outsource provider to supply and gain scale of benefits with. There are still reasons to outsource some of these, but this would be driven by robustness of delivery and removing noise from your business than direct efficiency gains. The second reason to insource would be for strategic benefit. If you have a application or process which is seen as a strategic advantage for your business and where you are prepared to invest incrementally more to ensure you maximise the value of the service outputs, then this is a reason to insource. An example might be your ERP system where you want to continue to incrementally tune and improve the service to extract maximum value. This usually requires someone that deeply knows your business, your industry and the products used and that capability and knowledge would be difficult or impossible to outsource at this level. But let’s also understand that such key people are also a key risk and that where possible their services should be complemented by an outsource partner for fallback support.
The hidden traps of outsourcing to multiple providers.
Most of our clients outsource IT services to ourselves and sometimes to multiple IT providers. Unless the customer is very large and very mature, best practise would dictate they should choose the smallest amount of partners to work with. An immature customer will have multiple outsource providers of similar capability, choosing to farm the work around. Sometimes this is driven by a desire to always get the best deal, sometimes by a sense that they don’t want all their eggs in one basket. Unfortunately, unless you are very clear around responsibility demarcations, any benefits are quickly outweighed by the risk of having gaps or conflict over who is responsible, including your own internal team. This also drives up costs as more of your resources, time and effort is spent managing suppliers rather than outcomes. Having multiple partners who are poorly managed translates into a higher risk position than fewer partners that are formerly managed. The cost of managing those partners would often be much more than any minor gain in multiple contracts. Those fewer partners also have more business with you and can afford to invest more into you and deliver higher quality outcomes. Only where a customer is big enough and mature enough (minimum 500+ seats, more so 1000+ seats) and with dedicated resources to manage multiple providers and can invest in the identification and formalisation of responsibility areas and the levels of service needed for each, will this be successful. By contrast where a company chooses a smaller number of partners or preferably a single partner, by default the responsibility inherently sits with them, even if no formal responsibility matrix has been established.
The hidden benefits of outsourcing.
One of the often overlooked benefits of outsourcing is that you fast track your maturity in that area. When you outsource to a provider who has been doing it for a long time and is their core business, typically they are very mature and efficient at it. This is not only from a technology perspective, but also a process perspective. As an example, when a customer outsources their Service Desk to Lexel, not only are they getting access to a highly redundant group of support staff ,who are available 24×7, but the tools and processes supporting that service are mature. Mature Service Desks are enabled by ITIL categories and reporting which then allows for a multitude of benefits including: ITIL Problem management (identifying repeat issues, then fixing the cause), reporting service levels delivered against agreed and managing to that, continuous improvements based upon insights raised from the same reporting and so on. It takes you from working reactively and almost blind, to working predictively and proactively, anticipating problems and issues before they arise or impact the business. It takes years for a customer to implement these processes and systems and is often hard to change the culture of their own team, yet when this is outsourced, this maturity lift occurs along with the significant gains almost overnight.
In addition, in the new normal where resources and skills are scarce and becoming more expensive, and at a time when IT becomes more complex and risks such as cost of downtime or security breaches increase incrementally, the broad skills and capability required by any business, large or small, cannot and does not reside in one or a small number of individuals any more. These unicorns don’t exist. Outsourcing provides access to the comprehensive range of capability, skills and knowledge required.
To recap, most companies up to 1000 seats (even higher) won’t get scale benefits in running the commodity aspects of their IT systems. They should however insource any roles which are proprietary to their business or that are of strategic value and where they are willing to pay more to implement that strategic service. CFOs need to be on the watch out for IT managers who fall into the trap of empire building commodity teams and as a result don’t focus on where they can truly add strategic value back into the business. By contrast, a mature and savvy business will save on cost, gain greater reliability and fast track maturity by outsourcing, importantly reducing noise across the business which enables them to zero in on opportunity to provide strategic advantage to the company.