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Almost a decade after the first furious foray into outsourcing, what has been learnt? This two-part feature investigates the past, present and future trends in outsourcing.

Outsourcing has received some bad press in the past couple of years. Businesses that rushed into securing long-term contracts in the late 1990s because everyone else was doing it soon realised that poorly-defined contracts actually cost more money in the long term then they saved in the short.

But does that mean that outsourcing is no longer seen as a viable way to streamline business processes? The experts generally agree that the use of outsourcers is, in fact, increasing. What has changed is the way in which these contracts are being specified and managed.

Voice&Data spoke with Jim Longwood at Gartner and Scott Ferguson at Check Point Software to find out the latest trends in outsourcing and how Australian businesses can make best use of this model.

How has the nature of outsourcing changed in the past five years for Australian businesses?

SF: Five years ago, outsourcing meant take that part of my business and just go and do it for me. I think both the customers and the outsourcers got frustrated with that, because things weren't well specified or as well documented as they should be.

This meant the customer had some expectations that weren't understood by the outsourcer and the outsourcer couldn't necessarily price the outsourcing because it wasn't documented properly.

Where that's come to in the last five years is: instead of outsourcing a whole section of the business, we see the banks, government departments and financial institutions that were heavily involved in outsourcing taking back a lot of control for the management - the business elements of the outsourcing.

For example, let's take a large insurance company. Five years ago it may have outsourced its internet security, but today it will probably outsource the management and provisioning of the transmission layer of the network. 'You give me my network, you give me the bandwidth, you manage the routers, and we'll manage the VPNs on top of that.

'We want you to host the firewalls and to look after the servers, but we'll manage the policies and the rules and we'll pull the reports off.'

And so the change has been that a lot of end users now understood they have to have responsibility for the business outcomes, but they can outsource parts of the execution.

JL: One of the key lessons learnt is the need to invest in managing the deal correctly. You have to manage the service provider according to the service outcomes you want. If you don't, they will go and service the squeaky wheel.

Is this a sign of a more mature market?

SF: Yes, and I think it's a very good thing - both from the outsourcer's perspective and from the end-user perspective. There's a much higher degree of satisfaction.

So the outsourcer might end up with what appears to be a smaller dollar value contract, but in reality it's probably a more sustainable contract, because it's better documented, better specified and gives the outsourcer a better opportunity to quote in a way in which he gets a return without the surprises we've seen historically.

What is the current trend in outsourcing?

JL: We're seeing a trend towards more multi-source deals. In the first round of outsourcing we would have a single source provider or a small number of providers.

For example, the South Australian government had a 10-year contract with EDS and has now split that into different lines of service across a number of players. The Commonwealth and Westpac banks are now starting to follow that path too.

We're now tending to see three, four or five different service outsource providers, which reflects a significant maturing of the marketplace. There's also more mid-size and large players in the market, indicating a horizontal segmentation.

The other thing we're seeing is that the contract terms have gone from 7-10 years in length to 5-7 years.

We're seeing a standardisation of services. To stay more competitive, providers have had to improve their services. They are starting to bring out standard service offerings and a commoditisation of the services provided. This brings continuous process improvements.

In the second generation outsourcing deals, we're seeing more successful deals as providers and suppliers have learned from the mistakes of the first generation. Management teams understand that outsourcing is not necessarily of cost benefit, but enables them to offer a better quality of service and become more competitive.

First-generation deals were often predicated on cost savings. The reality was that those were never achieved, because of inexperience on both sides of the equation.

These days, for example, we're seeing something like 60% of clients that are happy and only 40% unhappy with the deals they've got. That's still a high dissatisfaction rate, but is a lot lower than in the past.

Who has driven this change? The customer or outsourcer?

SF: I think it's been predominantly driven by the end users. The outsourcers themselves have had some influence, because some of those outsourcing contracts we saw years ago have damaged their business.

So they've gone along and said 'were not on a level playing field here. We think this, and you're expecting that, and there's a big gap in between'. So while I think it's been a collaborative exercise, the strong driver has come from the end-user company.

How does Australia compare with overseas?

JL: Interestingly in North America, only 25% of businesses are unhappy with their outsourcing deals. We're half a generation behind, but in government outsourcing we're actually leading the US.

Where we're behind is in business process outsourcing and offshoring.

Do you think there's been a backlash against outsourcing?

SF: I think it's more a dissatisfaction around outsourcing. But if you're a business and you're pragmatic and you look at the engagement you've had, then it doesn't take long to understand that maybe that engagement never had a chance for success because it was never documented, never specified, never clearly articulated what the expectation was.

And so what we're seeing is not the outsourcing business disappear or shrink, we're seeing it change from these massive all-encompassing contracts that were very poorly specified. Now we're seeing it broken down into much better and more defined chunks and businesses are realising that they have to accept responsibility for the total outcome.

You can't expect an outsourcer to make policy decisions on behalf of a business. They understand their own business process and the limitations or freedoms that it allows or imposes.

To be continued next issue.

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