A full night’s rest for Chief Executive Officers
Figuratively at least, CEOs are lying awake at night asking, â€œIs my IT infrastructure delivering what it needs to? In essence, are we doing IT right?â€ It is an age-old and important issue that causes CEOs considerable angst: â€˜What is the best way to manage IT infrastructure?
Unfortunately, there is no definitive answer apart from, â€œWell, it depends.â€ The goal of this article is to outline three alternative approaches to the delivery of Information Technology (IT) services and then to consider the pros and cons of each approach.
At the end of this article, you – as a CEO – will be better informed as to the likely benefits, traps and pitfalls of IT outsourcing.
IT – The Business’s ‘Problem-Child’
Information Technology is increasingly complex. The pace of change and innovation continues to increase. Competitive pressures ensure that IT, more and more, is required to deliver the innovation that is crucial to maintaining competitiveness in the marketplace.
Legislation (such as Sarbanes-Oxley in the United States and, to a much lesser extent, Corporate Law Economic Reform Program Act 2004 in Australia) and regulatory authorities (such as the Australian Prudential Regulatory Authority requirements over governance) have introduced stringent guidelines that require ever-higher service level standards from businessâ€™s IT.
Professionalism and maturity of the IT industry have also resulted in the adoption of service management frameworks to ensure consistency of approach and reliability of services.
Demographically, the increasing expectations of Generation Y in the workforce are significant drivers for innovation in technology – most of Generation Y have grown up with technology and have high expectations and understanding of what it can do for the business. They have high demands of IT and increasingly refuse to accept the status quo.
These increased demands upon IT have exposed the weaknesses of IT service models to deliver upon expectations. The results often manifest as poor service levels, a higher level of project backlog and an amplified level of user dissatisfaction. It is apparent that IT cannot be run â€˜hands-offâ€™ – it needs direction and scope around the expected service delivery, no matter the size of the business enterprise.
There are essentially three competing service delivery models at this time:
- Completely outsourced IT: Almost no technology assets are owned by the business and service level contracts are specified in terms of business outcomes. The service provider owns all assets and infrastructure and the business pays for services as they are consumed according to an agreed rate and at an agreed level of quality.
- Managed service provider: Under this approach, the business owns the technology assets but has contracts with a service provider or providers to provide technical expertise and to manage assets. Often, this expertise is provided remotely through the Internet.
- In-house IT: Under this arrangement, all assets and IT staffing are owned and managed by the business, with the business fully responsible for providing its own services, selecting its own technology and managing the entire process on its own.
All three models have examples of success and failure. In practice, most businesses adopt some mix of the three models, although this is often the result of inertia rather than considered and rational thought.
The following section explores the three models by looking at the strengths and weaknesses of each and following the experience of some of our clients that have adopted the relevant model.
Completely outsource Information Technology
Strengths and weaknesses
When IT is completely outsourced as a whole business unit – including assets and staff – the business recognises that most IT services required by the business are not strategic but rather transactional. The focus is upon the delivery of efficient transactional services and overall cost savings to the business. Where this holds true, the strategic impact of IT is minimal – IT is not a strategic innovator for the organisation, and delivery of cost savings becomes very important.
Outsourcing in this way allows the business to assign responsibility for IT to a service provider who is, presumably, much better at providing the services than the business. The benefit of this approach is its instant appeal – by outsourcing the entire business function, all the benefits of outsourcing become available very quickly to the entire business. For businesses experienced with outsourcing, that know their IT requirements well, and that are able to manage the inherent project risk of a â€˜big bangâ€™ approach, completely outsourcing in this manner can deliver significant business benefit.
For outsourcing like this to work, a business must understand its IT requirements in a great level of detail in order to specify the services required. A mature approach to relationship management and contractual management is necessary. There are pitfalls – particularly if, for example, the â€˜undocumentedâ€™ services provided by an in-house IT team are not included in the service level agreement.
Outsourced arrangements also often fail to recognise the requirement for strategic management of the relationship with the service provider. Outsourcing arrangements in the past have delivered benefits in the early yea