Getting the Right Balance of Application Outsourcing

March 2, 2010
As industrial manufacturers strive to succeed in one of the most challenging business environments in history, it will be more important than ever that they make effective use of their information technology (IT) to remain competitive.
Application Development and Maintenance (ADM) outsourcing has gained popularity as a key strategy for helping manufacturers reduce costs and sustain competitiveness. But getting the right number and the right balance of providers can be a challenge for even the most experienced organization. Too few ADM providers are not good from a risk-management standpoint, while too many can impact efficiency.In trying to leverage the benefits of ADM, some companies have amassed a complex network of multiple suppliers to meet their needs. But managing such a network can increase costs, not lower them, and adversely affect competitiveness. Other companies rely on a small number of ADM providers, but have not implemented procedures to ensure that they maintain the right level of competition and mitigate any risk. In contrast, leading organizations are achieving more by engaging the right balance of ADM providers.According to research by Accenture and the Everest Research Institute, having an effective balance of ADM providers can save 22 percent to 28 percent of ADM cost for companies, on a total cost of ownership basis. This includes both one-time and recurring cost reductions. One-time costs, for instance, can be reduced 35 percent to 40 percent by working with an appropriate number of suppliers. These savings are achieved primarily through savings in specifying, tendering, evaluating, selecting, negotiating, contracting, transitioning, managing and governing the additional work.Moreover, the research found that recurring costs can be reduced 20 percent to 25 percent as fewer contracts, invoices and compliance issues require less management time. But mostly, the reductions result from economies of scale that enable providers the flexibility to locate more senior roles anywhere within their global workforces, offering the best skills and the most appropriate locations that can be found.Simpler portfolioOnce complexity is addressed, there are three areas companies need to focus on to make their portfolios effective. These are organization, operation and process management.Companies will need to decide what form the ADM organizational structure will take, such as enterprise level vs. specific business units and/or geographies. This will become the foundation for making future decisions.Next, manufacturers will need to choose between two broad engagement models—harmonized or orchestrated. The harmonized model involves companies acquiring talent at the best price and defining the primary tools and processes for service delivery. The orchestrated approach comprises attaining results from suppliers through defined objectives, while requiring the suppliers to determine how to attain results.Lastly, achieving optimal performance from day-to-day operations will require careful management of three key areas:•  Division of work:  Actions taken by suppliers within the ADM supplier network are often interrelated, and if not seamlessly performed, can affect the overall productivity of the operation. Therefore, greater coordination will be required to optimize productivity and maximize results. •  Scope:  The scope of work outsourced will have implications on the complexity associated with managing it.•  Governance model:  Consensus on the IT strategy and how to best manage it will provide a more predictable environment and more consistency of use. Finally, whatever reasons there may have been for using more complex ADM portfolios in the beginning, high performers are now simplifying how they engage their vendor bases. When a manufacturer succeeds at simplifying its ADM portfolio, it can achieve lower costs, higher productivity and greater business impact.James Robbins, [email protected], is a senior executive for Accenture, a global management consulting, technology services and outsourcing company.

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