MSB and Large Business Tactics Differ for Applications Outsourcing

Transcription

1 Research Brief MSB and Large Business Tactics Differ for Applications Outsourcing Abstract: Comparing large enterprises' and midsize businesses' applications outsourcing strategies reveals many similarities, but also some noticeable differences. By Allie Young Recommendations When considering outsourcing enterprise applications, midsize businesses (MSBs) must think strategically but act tactically to align performance goals with specific near-time objectives. IT managers, the key decision maker for applications outsourcing (AO) in MSBs, must ensure the involvement of cross-functional teams in any decisions, as well as the business executives that will be impacted; consensus and executive buy-in are critical success factors in all outsourcing decisions. Publication Date: 29 October 2003

2 2 MSB and Large Business Tactics Differ for Applications Outsourcing MSBs' Applications Outsourcing Profile In the second quarter of 2003, Gartner's Primary Research Organization surveyed 140 enterprises that had experience with multiyear/annuity AO engagements. The goal of the survey was to understand a variety of issues regarding enterprises ' AO strategies such as outsourcing plans and practices, drivers and inhibitors, vendor selection, and contracting practices. Of these respondents, 86 enterprises had more than 1,000 employees (identified by Gartner as "large enterprises") and 44 had between 99 and 999 employees (identified by Gartner as "midsize businesses," or MSBs). Gartner identifies AO as one of the four core segments of IT outsourcing; the other segments are data center, desktop and network outsourcing. AO is arguably a more complex and sensitive outsourcing decision than infrastructure outsourcing because of the close connection of enterprise business applications to overall business success and performance. A comparison of MSBs' and large enterprises' AO strategy and behavior is enlightening. Analysis of the data reveals many similarities in how large enterprises and MSBs approach their AO decisions. However, when it comes to the influencers and decision makers for specific phases of the AO decision process, MSBs exhibit some unique characteristics. MSBs and Large Enterprises: More Alike Than Different Gartner has often noted that MSBs are more likely to have a "tactical" approach to their outsourcing decisions than large enterprises. We specifically asked respondents to self-evaluate their approaches to AO. About 40 percent of MSBs categorized their approach to outsourcing applications as being "tactical" (seeking immediate results to solve a problem or achieve benefits) while 60 percent say they assume a strategic approach (focused on long-term outcomes or payback). This is compared with large enterprises that evaluated themselves slightly differently; 30 percent claimed to have a tactical approach, while 70 percent claimed a strategic approach. Self-reported appraisal is one element to consider; other data reveals why, from a decision-making perspective, there is additional proof for Gartner 's opinion that MSBs are more inclined to a "tactical" approach in their sourcing decisions. When it comes to technical issues influencing AO "triggers" to outsource applications, and drivers and inhibitors for AO, MSBs and large enterprises reflect almost identical views. The following data points are pertinent proof of the similarities between the two groups' AO strategies: 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 29 October 2003

3 Technical issues influencing AO In rank order of importance, MSBs and large enterprises were identical in their prioritization of the following: Improve service levels to end users Access to critical technical skills/resources Upgrade applications quality, processes and methodologies Triggers to outsource applications Corporate cost reduction initiatives and a major technical transformation were ranked as the foremost issues (No. 1 or No. 2) influencing both MSBs and large enterprises to consider AO. Business issues as drivers/influencers for AO In rank order of importance, MSBs and large enterprises were identical in their prioritization of the following drivers to outsource applications: Reduce costs Ensure scalability/flexibility of applications resources/capacity to business needs Focus on core business Inhibitors to outsource applications For both MSBs and large enterprises, the following were identified among the top three inhibitors to outsource: High costs associated with outsourcing Security issues Cost savings not realized Different Behaviors Appear in MSBs for AO Life Cycle Decision Making There is a marked difference in how MSBs and large enterprises behave with regard to the decision-making process for outsourcing applications. Gartner Dataquest asked respondents to identify who in their enterprise was most influential in the following phases: Develop the outsourcing strategy Initiate the decision to outsource applications Create the request for information/request for proposal Evaluate/select the vendors Develop the statement of work and service levels Negotiate the contract Manage the contract Gartner, Inc. and/or its Affiliates. All Rights Reserved. 29 October 2003

4 4 MSB and Large Business Tactics Differ for Applications Outsourcing For each task/phase, respondents could choose from a list of titles common to most organizations: CIO, procurement officer, IT manager, CFO, business unit executive, CEO/COO/president, strategic sourcing executive, third-party consultants or legal firm, and "others." Table 1 provides the top three and four individuals identified as most influential for both the MSB and large enterprise organizations. Table 1 Top Influencers in the AO Life Cycle: A Comparison of MSBs and Large Enterprises Task/Phase Title of Individual MSB (%) Large Enterprise (%) Develops Sourcing Strategy IT manager CIO CEO, COO, president 11 4 Initiates AO IT manager CIO Business unit executive Creates Request for Information/Request for Proposal IT manager Business unit executive CIO Evaluates/Selects Vendors IT manager CIO Business unit executive 6 6 Develops Statement of Work and Service Levels IT manager CIO CFO Business unit executive Business unit executive Negotiates Contract CIO IT manager CFO Procurement officer Manages AO Contract IT manager CIO Procurement officer 6 6 Business unit executive 3 12 Notes: Total number of respondents = 140 MSB number of respondents = 35; large enterprise number of respondents = 49 Single response per phase/task. Only the top three to four responses are provided, so percentages will not equal 100 percent. For "develops sourcing strategy," the responses for MSBs and large enterprises are statistically different. Source: Gartner Dataquest (October 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 29 October 2003

5 5 Gartner Dataquest Perspective This data reveals that the structure of influence and power for MSBs' AO decisions rests with the IT manager. For all phases, with the exception of contract negotiation where the CIO is most influential, in MSBs the IT manager rules the decision-making process. In comparison, large enterprises report far greater variability and assignments of roles/responsibilities for outsourcing; the CIO, the IT manager, the business unit executive, and the procurement officer alternately assume more influence and control in different phases. Of note, neither MSBs nor large enterprises have CEOs, COOs or presidents who exert strong influence in AO decisions. However, in small businesses (less than 100 employees), Gartner Dataquest believes the CEO will be more influential because of the expanded oversight role that CEOs tend to play across multiple functions, including IT. Although the size of an organization obviously influences the sheer number of individuals with executive or leadership responsibilities in enterprises, it is nevertheless surprising that the CIO appears "second in command" in most MSBs regarding outsourcing decisions relative to enterprise applications. The following credible explanations help interpret this disparity in roles between MSBs and large enterprises and help to identify MSB AO strategies: Some MSBs (particularly the smaller enterprises) do not have CIOs, or alternatively they have fairly "flat" organizations. "IT manager" is the highest-ranking title in IT organizations. In some small businesses, IT managers are the IT department and may split their time managing other functions, such as finance. MSBs are generally inexperienced with outsourcing and have not elevated the development of a "sourcing strategy" to the CIO level. MSB CIOs are focused on connecting with business executives with regard to business initiatives for IT strategy and do not yet consider outsourcing to be among these business-oriented strategic issues. Outsourcing (of applications, or in general) is an ad hoc decision, handled as needed, by IT manager-level individuals in organizations. Some grains of truth from each of these potential explanations most likely underlie or define the MSB approach to outsourcing in general and AO in particular. But in the final analysis, Gartner can only deduce that outsourcing as a core element of IT strategies in MSBs is still not yet welldefined and, therefore, is not fully integrated to support strategic business goals. This supports our past viewpoint that MSBs tend to be more "tactical" (than strategic) in their outsourcing decision making regardless of their self-evaluation where the majority (60 percent) of MSBs view their AO approach as "strategic." 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 29 October 2003

6 6 MSB and Large Business Tactics Differ for Applications Outsourcing As MSBs gain more experience in outsourcing in general, and in AO in particular, we expect a shift in responsibility to higher-ranking executives, whether it be the CIO or a new title of "chief sourcing officer." Key Issue What strategies and processes will small and midsize businesses employ to ensure business and IT alignment? This document has been published to the following Marketplace codes: SOFT-WW-DP-0151 ITSV-WW-DP-0553 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice