Strategic outsourcing partnerships headed for a big shift

The old paradigm of just focusing on operational costs will not work anymore

In the past 10 years, outsourcing has evolved beyond being viewed as a purely tactical exercise to reduce cost and increase operational efficiency. With information technology moving from being a business enabler to the business core, the sourcing decisions and motivations have shifted widely. IT is no more a CIO's bastion; CMOs/CXO's, in many organisations, are making decisions on technology enablement.

There is a shift in the mindset - bringing strategic capabilities in, versus sending work out. This is one reason enterprises are balking at the word "outsourcing" to describe these sourcing relationships. According to an industry estimate 63 per cent of business and IT services consumers would like to drop the term 'outsourcing' entirely. CEOs rarely talk about 'outsourcing' these days. Their approach is now so integrated that there is no 'out' and no 'in' anymore. So how does the enterprise respond to the same and what is the relevance of a strategic outsourcing partnership? The strategic partners are now chosen based on their ability to help enterprises transform, and not just having competency in a specific area.

While the "why" behind sourcing has evolved considerably, the "how" still lags. To understand this, a strategic outsourcing at its best has not been a service offering that the enterprise customers have bought, rather it has been a response to the requirements (short/medium/long term) of the end consumer. I believe that the next wave of enterprise innovators would create partnerships that not only solve their needs to respond to the marketplace but also create competitive advantage.

Here are some examples that should put some context to the requirements: Indian banks are seeking for profitable operating model that allows successful access to basic financial services to unbanked geographical areas. The old paradigm of just focusing on operational costs or implementing core banking may not work. Mass segmentation and deep understanding of individual customers will drive profitable growth. A better measure for the banks is business productivity targets for employees that integrate processes and technology. It has a holistic impact on cost income ratios.

Similarly for the telecommunication players today, the business context is off-take of data services, value added enterprise services, segmentation of clients and an increase in ARPU (average revenue per user). The economies of scale models based on additional subscriber base will not fully capture the way forward for the business. In India we have an unique advantage that there is a significant number of emerging businesses that are focused on growth. The entrepreneur is always open for innovation and addressing scale. In industries as diverse as renewable energy and education technology is playing a huge role in changing the business model.

The partnering strategy may vary from one organisation to the other. While the majority of services buyers expect high-quality support, tailored business knowledge, customised services and the "best price", a new breed of c-suite leaders are also asking for partners to have their fees lined to the promised business outcomes.

The key differentiators for the right partner for the enterprise innovator would need to demonstrate domain depth, process engineering skills, relevant intellectual property, utility models and the enabling financial construct, enterprise innovators who have extensively adopted long-term sourcing strategies for innovation as their key motivation have seen two times more revenue growth and three times more gross profit growth than those who have outsourced narrowly for short term operational efficiencies. After all, business transformation is a long-term journey, and not just a short term effort. In a world where barriers are disappearing fast, organisations would look to tap into an ecosystem of collective intelligence and distributed talent.

Ajoy Menon
Director, Strategic Outsourcing, Global Technology Services, IBM India/SA