The Third Wave of Outsourcing: Process Improvement

In the 19th century, far-sighted investors began pouring capital into railroads and rail networks that would soon traverse America and Europe. As the infrastructure was put in place, commerce exploded – leading to an economic boom of unprecedented proportions. The scale of trade and travel reached remarkable new levels. Meanwhile, those who moved goods through carriages, canals and even steam ships saw their businesses steadily eclipsed as those methods of transport diminished in relative importance.

Something much like this pattern is repeating itself in our global, hyper-competitive era. Instead of moving goods, we are moving information. It is now the volumes of data, transactions and interactions that are exploding. In order to keep up with demand and capitalize on our resources, we need dynamic infrastructure that can scale. We need infrastructure management – network hosting, help desk services, messaging, security and database administration – based on precision and measurement, process discipline and operational excellence. It won’t do to simply hire more carriage drivers or seek lower costs for canal transport – not when the train is leaving the station.

The challenge ahead is that operational demands will only grow as companies become more strategic with their IT. If their foundations are not solid and scalable, then the whole house can fall. Companies increasingly need to outsource in order to concentrate their resources on strategic activities. But outsourcing partners can’t deliver true operational excellence if their business models are based merely on skilled labor. Service providers must have world-class processes, methodologies and systems in place if they are to cost-effectively scale to meet the growing infrastructure demands of business.

“Companies now realize that the old ways of managing infrastructure won’t get them where they need to go,” says Tim Ferguson executive director of the Infrastructure Management Institute at Northern Kentucky University. “But most have not yet made the leap necessary to embrace the new approach. Their dissatisfaction with the current state of infrastructure, however, will be a significant driver of change and momentum over the next three to five years. The most progressive companies, in fact, are taking action now.”

The Three Waves of Infrastructure Management Outsourcing

Companies have long recognized the challenge addressed here in some form or fashion. While they have taken steps to internally automate aspects of IT infrastructure management, they often come to the conclusion eventually that much of the infrastructure is best left to third-parties. Over the years, there have been three essential waves of IT infrastructure outsourcing, among them:

  • Cost-driven outsourcing
  • Competency-driven outsourcing
  • Predictive and process-driven outsourcing

The first wave was concerned primarily with cost. Going back to the 1980s, the trend really started to pick up as companies looked to large outsourcing providers to manage their data, including their mainframes and other types of foundational infrastructure. This wave also covered back office operating processes such as payroll and transaction processing. Companies realized they could reduce back-office operating costs by turning to service providers that could leverage their own infrastructure and people across many clients.

The second wave – which hit in the early 1990s at the apex of reengineering – was concerned with maximizing core capabilities or competencies. Companies believed that to remain competitive they needed to concentrate on the activities they did best. However, the outsourcing options available to them continued to require labor-intensive and relatively unproductive solutions. Negotiations around outsourcing often revolved around the number of people devoted to specific tasks. While resumes were often scrutinized, little attention was put into introducing new, more productive approaches to infrastructure management.

The popularity of offshore outsourcing in recent years largely represents a combination of these two earlier waves. Companies clearly are looking offshore for cost advantages. Labor for certain foundational roles is much cheaper in places such as India and Eastern Europe. But companies also justify their offshore decisions in terms of maximizing core competence. They note that many highly skilled IT professionals are now found abroad – individuals who can competently take over operational tasks that represent no competitive value. The problem is that offshore service providers often merely continue managing infrastructure in the same low productivity, labor-intensive ways as everyone else.

Surf’s Up: Third Wave Rolling In

The third wave actually began to build in the late 1990s. We have seen a shift toward predictive and proactive infrastructure management in areas such as network support, messaging and help desk management. The newest areas that are being targeted for this kind of approach are security and database administration. It’s a shift toward infrastructure management based on discipline, agility, scalability, global support and operational excellence. This wave is about proactive systems, methodologies and processes as opposed to reactive, labor-intensive approaches. It recognizes that gains associated with low-cost labor in the short-run can’t be sustained over time as the operational demands of enterprise IT infrastructure increase.

“This is the new paradigm,” says NKU’s Ferguson. “Forward-looking CIOs now realize that infrastructure is not a competitive differentiator for them. It is becoming a commodity. The most advanced companies, many of which are in the Fortune 100, are looking for ways to intelligently outsource their infrastructure so that they can concentrate on the activities that represent a competitive advantage.”

The productivity of IT operations groups should be a key concern for companies as they address the competitive challenges of today’s markets. While investments in hardware and software declined from $363 billion in 2003 to $315 billion in 2004, investment in personnel-related expenditures – IT salaries, benefits and IT services – grew from $370 billion to $390 billion during the same timeframe.

According to Forrester Research, the key drivers of this accelerated growth in personnel costs are the increased complexity of applications, the lack of maturity of IT management processes and the lack of IT process automation. Due to growing complexity and an absence of rigorous processes, IT operations groups “spend an inordinate amount of time in the trenches, leaving less time available for more strategic work and forcing firms to hire more IT personnel to address the problems,” writes Jean-Pierre Garbani, a senior analyst with Forrester.

Garbani believes the solution lies in process improvement and automation. “One key element of improving industrial processes is automation,” he states. “Using automation for a number of repetitive tasks guarantees higher quality and lower costs. This is also true of IT processes.”

The big question now is whether companies will continue to try to handle these infrastructure challenges on their own or whether they will turn to specialized service providers. And while the limitations of conventional first or second wave outsourcers have become increasingly clear over time, some progressive companies are having great success with third-wave outsourcers. Whereas prior waves of outsourcing were based on asset shifting or global labor arbitrage, third wave players base their businesses on systematized processes and IT automation.

One national retailer turned around its financial fortunes by selectively outsourcing several infrastructure components including network management and database administration. This enabled the company, which operates on very thin margins, to better manage its data assets – using business intelligence and data mining to identify bottlenecks, streamline operations and more strategically manage its supply chains. This recognized company is now on a fast growth track as IT becomes a strategic partner in the business as opposed to merely a provider of tactical support.

Another large Midwestern research hospital has developed a service-oriented architecture to unify the clinical and research sides of the enterprise. Now, the IT infrastructure comes together at the point of patient care, enabling the hospital to securely manage huge amounts of patient data and provide higher levels of service. By outsourcing help desk, messaging and intrusion detection services, it has not only achieved operational excellence and wrung out costs, it has freed up resources to develop and roll out the innovative services that will enhance its prestige as a world-class healthcare institution.

While much of the challenge of process automation and improvement concerns the internal work of the IT organization, it’s clear this principle must also apply to an enterprise’s infrastructure outsourcing partners. If companies are to seek the benefits of infrastructure outsourcing, they must look to partners that not only address concerns of cost and core competency, but process automation and improvement as well.

Whether an IT infrastructure process is kept in-house or outsourced, continual process and productivity improvement is critical – and this will depend on automated systems. The problem with many first and second wave service providers whether onshore or offshore is that they often don’t adequately address these concerns. They have very little strength in terms of process automation and systematized service delivery. That’s where the third wave of infrastructure service providers – whether in the areas of network support, help desk or database management – have proven most compelling.

Useful Links

Infrastructure Management Institute at Northern Kentucky University

Forrester Research