20 Mar IT outsourcing according to Tom Koulopoulos, part 1
Global consultant Tom Koulopoulos said at the Fusion2006 CEO-CIO Symposium this month that companies should identify information technology work they do that does not support their core competency and push it outside of the organization. As you might expect, a discussion of outsourcing versus doing work in house raises a lot of questions, so WTN followed up with the Delphi Group founder to tap his experience in IT and outsourcing.
This is part one of the interview that followed.
WTN: Among all the ways to make yourself more competitive, why focus on outsourcing IT functions?
Koulopoulos: There are several reasons. Probably the foremost reason is that increasingly organizations are finding themselves having to create differentiation for their products or services based on a certain rate of innovation. Different industries have different rates. So if you’re in paper pulp manufacturing maybe it’s innovation every 10 years. If you’re in consumer electronics it’s innovation every 6 months. But there’s some metronome of innovative changes.
That metronome is ticking faster and faster, so you’ve got to apply your energy to the process of innovation given your cycle time within your industry. The more IT you have supporting that innovation, the more likely you are to be successful, in my mind.
If you’re dedicating much of your IT to “keeping the lights on” types of activities that are commodity, you are probably not going to be innovating as quickly as you could have in those core areas. It’s not a black and white issue. It’s not a case of, let me take 75 percent or 80 percent of my IT staff and get rid of them. It’s a matter of incrementally moving IT more and more into areas where they are supporting what is core.
What’s interesting is, it’s real simple to say that, but what you’re assuming, and it’s a big assumption, is that the organization has defined its core competency. Although that seems like a natural thing for any organization to have done, in my experience it’s incredible how few organizations have a simple, clearly stated core competency, both internally and externally.
WTN: Can’t companies come up with useful innovations in non-core areas, though?
Koulopoulos: Assume that if you take any set of activities within an organization, some would be core, some would be non-core. And assume furthermore that we agree we need to really focus our innovative capacity on the core activities. Next question is: Is there room for innovation in the non-core?
And my answer would be, there always is room for innovation in the non-core, but you’re probably not the one best suited to innovate the non-core stuff.
So if you’re a hospital, and patient care is the core competency that you bring, that’s what you want to be known for. Should you be running the cafeteria? No, of course not. No one would argue that.
Should you be running the patients’ electronic records? Interesting. Maybe that supports my core competency because in the operating room I need to have access to those records more frequently than some other hospital might. So I’ve got to ask very tough questions about those areas where there is questionable performance or coreness to the activity. It is something that I should be doing or that I should partner on, because you might find a partner who has done this so many times with so many other hospitals that they could deliver extraordinary patient records that could deliver extraordinary patient care.
Most companies would rather just say, “Let’s do it all on our own. We have the people, we have the resources, it’s easier to do that than to partner.” And in some cases I can understand that, but in the long term I think it’s easier to build a sense of partnerships.
WTN: Or, if you’re Google, you hire gourmet chefs for your cafeteria.
Koulopoulos: That’s actually a neat example, because the executive chef clearly has a core competency in being a chef. So you make a decision. You say, we’re going to invest in this, because we believe that our core competency relies heavily on motivated people, on exceptional people who want to work 24 by 7, and if we feed them real well, they are more likely to do that. And we can do that better than anyone else.
So the risk of having them eat cafeteria food, of Marriott serving them outsourced Marriott food, is too great for us. We would rather invest in an executive chef and have them prepare the meals. But again, a decision was made there that the risk of going to an outside provider outweighed the benefit.
WTN: Are small or large organizations more likely to try to take too much on their own shoulders?
Koulopoulos: It’s really the middle market where most of the opportunity to execute on this vision of core versus non-core really exists. At the low end, it’s more than likely that the company is going to try to do it all itself, and it ends up being less a matter of cost and less a matter of competency and more a matter of timing. If we do it ourselves we can get it done a lot faster than if we try to coordinate with someone else. At the high end, the Bank of America for example, the internal economies of scale are so large, it is actually more effective for those companies to do it themselves. It’s the middle market where the opportunity really exists.
On to part two.