Outsourcing Continues to Grow, but how Strategically?

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Hewlett-Packard (HP) Corp. recently announced winning a $675 million outsourcing contract with Unilever. In other news, Wipro Ltd. expanded its outsourcing wins, while a recently published study questioned whether outsourcing contracts were achieving strategic business objectives.

Focal Points:

• HP officials recently announced that Unilever PLC extended its outsourcing contract with HP for an additional seven years. The contract extension was worth $675 million dollars. The contracts calls for HP to manage Unilever's IT infrastructure worldwide, including operations in Asia Pacific, Africa, the Middle East and Turkey. Some of the elements HP will manage include data centers, disaster recovery services, and 4500 various Unix and Microsoft Corp. Windows-based server and storage systems. The contract terms call for about 250 Unilever employees to be seconded to HP.
• Officials from Wipro stated that they had recently won a five year IT outsourcing contract from India's Pantaloon Retail Ltd. The contract is worth US $50 million. Officials said the contract called for Wipro to manage Pantaloon Retail's IT infrastructure for its 1000 retails outlets across India.
• A recently published outsourcing study found that outsourcing was generally saving companies money, but not helping them achieve their strategic business objectives. The report showed that more than 89 percent of outsourcing projects saved at least 25 percent in IT costs. It further found most of the reasons for outsourcing were focused on cost savings or access to external expertise, as opposed to improving customer value or gaining any competitive advantage. This is in line with typical findings from Experton Group, where most outsourcing is done for either commoditized IT operations or to have functions performed that are not core to enterprise expertise.

Experton Group believes most companies are not likely to choose outsourcing to achieve strategic company objectives. While this is a nice idea, the reality is that most companies will keep internal those operations and processes that they believe are their strategic, competitive advantage. Most companies are likely to reserve outsourcing for non-competitive, commoditized functions that can better be done by a dedicated staff at a reduced cost.  While it is a good idea to have a close relationship with key outsourcers that understand company business objectives, IT executives are advised to keep strategic, value-added functions internal to key enterprise operations.