Outsourcing in the New World Order

Sanjiv Gossain, UK Managing Director of Cognizant Technology Solutions, explains how the role of outsourcing in the retail sector is changing in the current economic climate

As pressure mounts on the boards of major retailers to reduce costs, streamline operations and maintain shareholder value in the face of recession, CIOs and CFOs find themselves in a difficult position. Maintaining or improving current results with less capital and fewer resources is a serious challenge. As senior management looks at areas where costs can be reduced, IT projects are inevitably coming under increased scrutiny and outsourcers are being challenged to prove their worth more than ever.

The evolution of IT project delivery

IT delivery has changed greatly over the past 15 years. When the outsourcing industry first developed, retailers looked for service providers solely to reduce costs. As the global delivery model grew, outsourcers began to take advantage and used lower-cost regions to deliver some of that cost benefit, for example to run offshore call centres. In the short term these relationships were a success, but anyone involved in outsourcing projects at that time will admit that limitations soon became apparent, as it became evident that long term, large, monolithic outsourcing contracts may have delivered cost savings but were failing in terms of agility, productivity and responsiveness to the business, and could not handle the transformation needed.

Complex and transformational retail projects such as supply chain optimisation or loyalty scheme implementation, requiring greater skill and co-ordination between the client and provider just werent suited to this early model, so naturally it evolved. Rather than doing all work offshore, onshore offices to provide better local contact and expertise, were set up to support more complicated projects, and over time the long-term business impact of this combined model became another major driver of outsourcing decisions. However, as a result of recent shifts in the economic landscape, the outsourcing industry is having to adapt once again as cost shoots back to the top of retailers agendas.

Changing attitudes

What does this mean for IT chiefs and their outsourcing partners? Well, opinion is divided. A survey by sourcing company Equaterra, suggests that the recession has not reduced UK businesses demand for outsourced services. Conversely, TPI, a consultancy which tracks large financial outsourcing deals, says that it has seen a decline in the number and size of deals since 2007. Looking specifically at retailers, a recent report from Datamonitor suggests that demand for outsourcing will increase during the downturn, albeit for a mixture of lower value contracts rather than large scale changes in infrastructure.

From our perspective, weve definitely found that companies tend to slow down decision making in times when cost pressures really come to the fore. They re-evaluate and realign their investment from projects that prioritise long-term transformational benefits, to those with immediate cost savings. The ideal scenario of course is to plan IT projects that can deliver both.

Whats certain is that retailers now want much tighter control of any IT projects they embark on.

Back to basics

Given the current challenges, there will be some companies who come to the conclusion that it is in their best interests to keep IT projects in-house, where they believe they can keep a tighter rein on things. But is this the right approach? Certainly, some CIOs may feel more comfortable with their IT delivery under one roof, but the recession brings sharply into focus the original reason they considered outsourcing in the first place to reduce costs.

However, cost is only one of the issues and the ability to share risk is also a key benefit. The current climate means that IT providers have never had a greater incentive to deliver to their promises. Theyre aware that projects need to produce tangible cost savings and business efficiencies in a short time frame; otherwise the partnership is likely to come under scrutiny. And when the going gets tough, it can help to have a rationalised supplier base where one company is responsible for delivering projects according to terms set out in a Service Level Agreement (SLA). This cuts down on the complexity of the relationship and the time spent managing it, freeing internal resources to focus on other priorities.

Weve all seen over the last few months how quickly market conditions can change, and how quickly these fluctuations can be reflected in IT requirements. Crucially, outsourcing providers can deliver flexibility to scale projects up or down in line with demand, something in-house teams find difficult. IT partners can also be relied on to provide valuable consultation, insight and specialist industry knowledge (often gained from providing IT solutions to retailers in similar situations). And whereas early outsourcing contracts saw work simply thrown over the wall, companies should now be looking to work with third parties to use this insight to help determine and plan IT strategy. Retailers need partners who can demonstrate real thought leadership, with the expertise to identify where cost savings and efficiencies can be realised most effectively, meaning efforts arent wasted elsewhere. The best service providers will combine this strategic thinking with cost reduction moving processes offshore to generate immediate savings and then transforming them over time to achieve new levels of performance.

Outsourcing partners increasingly offer knowledge-based BPO services outside the traditional areas of IT or ancillary support, which may not have been previously considered for outsourcing. These tasks are typically domain specific and require staff who are highly qualified, professional and mature. The wide availability of skilled graduates in regions such as India or China have made these tasks possible, and the wage differential between onshore and offshore means that the cost advantage is maintained. In the retail sector, this work could include advanced market research and analytics that can reveal valuable insight into shoppers in-store or online purchasing habits. This intelligence can then in turn be used to refine store layout or alter direct marketing activities.

Today, measuring return is still the most important factor when embarking on new IT projects.  Service providers should work with organisations to establish goals and outline timeframes for their completion. Its now almost standard for SLAs to be agreed as part of contract negotiation, setting benchmarks in areas such as savings to be generated, productivity and efficiency, and outlining the planned approach to business process transformation. Retailers worried about potential risk can also ask IT providers for a transaction-based pricing model. Rather than simply committing to work on a project for a certain period of time, this guarantees a set price for a set outcome putting the onus on the outsourcer to perform the task in a timely and efficient way.

Conclusion

With most national economies experiencing the sharpest fall in consumer and business confidence for almost 20 years, the business outlook is understandably uncertain. With this in mind, all investment is under the microscope and IT projects need to prove they can make a long term contribution while providing a shorter-term cost advantage. It is natural for outsourcing projects to come under increased scrutiny, but the best service providers will have already adapted to meet the demands of the new world order marrying the traditional priority of cost reduction with the business transformation required to drive performance in the years ahead. Retailers should in fact use the downturn to forge closer, more tightly-defined relationships that can reap benefits, both now and in the future.