Businesses are in danger of losing control of their outsourced IT projects due to a lack of internal leadership and poor business sourcing strategies.
A study by Leslie Willcocks, professor of technology, work and globalisation at the London School of Economics, found organisations must retain key skills and competencies in their in-house teams if they are to truly benefit from relationships with outsourcing suppliers.
The report called "Building Core Retained Capabilities," shows that organisations are currently prioritising short term cost reductions over an "invest to save" strategy, resulting in a number of outsourcing projects developing problems such as loss of control, inadequate service, and constant renegotiation due to a lack of strong internal leadership and project management.
He said core capabilities need focus including leadership, business systems thinking, relationship building, architectural planning and design and informed buying, which lean towards softer business skills. The consequences of failing to invest internally in these core competencies are sizeable and include high contract costs.
Willcocks said investment in these capabilities is expensive and that by 2010 the cost of managing outsourcing contracts will be 10% to 12% of the total.
Willcocks said this is important because within four years about 58% of the average corporation's IT budget will be spent on outsourcing.
"Organisations must spend- to-save now, by investing in the right internal skills to develop long term strategic benefit," he said.
The study reveals that in practice the recruitment and retention of individuals with these capabilities is confined to a small, high quality group, compounded further by the fact that current retained functions tend to possess strong technical expertise but are weaker on business and interpersonal skills.
This results in a major human resources challenge and organisations need to be prepared to upskill and recruit to provide the right resources and support to create a successful in-house team.
"In 15 years of research we have found that organisations are continually faced with a key challenge – what needs to be outsourced and what needs to be retained? We have found a link between the lack of investment in core in-house capabilities and the disconnect it creates between the outsourced function and the retained portion of the enterprise," he said.
"Skills such as relationship management through senior management attention, contract, structure and refined capabilities can create a 20% to 40% difference on service, quality, cost and other performance indicators. If organisations are to benefit from outsourcing, a real change of focus is needed; from activities and assets to leadership, management and appropriate staffing."
In addition to assessing the current IT outsourcing landscape, the paper makes some key predictions for the outsourcing market in the future, especially in the areas of global sourcing, supplier strategies and client developments. Key predictions include the rise in business process outsourcing activity overtaking IT outsourcing and the increased prevalence of nearshoring.