The Future of Outsourcing

R-12-5500 Strategic Analysis Report
A. Young, T. Berg 9 May 2001
The Future of Outsourcing
Management Summary
Outsourcing, as a business strategy and a relationship model, has evolved during the past decade to
become a dominant force in enterprises IT strategies. A broader definition of outsourcing as a contracting
model to acquire any IT services is resulting from widespread reliance on third parties to support business
goals. Growing recognition of the imperatives to align IT and business strategy has been a significant
driver for the adoption of a business-focused approach to IT and, thus, outsourcing strategies. From
once being perceived strictly as a technical tool used by organizations to manage or optimize IT assets
and infrastructure, outsourcing has gained a broader foothold in some organizations to encompass the
responsibility for the underlying IT-enabled business processes and even business outcome. Not
surprisingly, the impact of e-business is a significant factor in all aspects related to IT products and
services calling into question what the future outsourcing demands will be, and how IS organizations
will respond to a radically different world. Gartner believes that organizations future sourcing strategies
will be shaped by several factors, including:
Outsourcing to multiple suppliers will become the predominant model in enterprises sourcing
strategies.
Enterprises outsourcing strategies will take advantage of four distinct and unique models:
management, access, optimization and creation.
Enterprises will adopt the outsourcing model and relationship construct that supports the outcome
(i.e., value) and the approach (i.e., delivery) required for optimal results.
This Strategic Analysis Report examines the evolving nature of the outsourcing marketplace and
enterprise requirements, and provides a view of the future of enterprise sourcing strategies.
Gartner
Entire contents 2001 by Gartner, Inc. 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.
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Copyright 2001 9 May 2001 2
CONTENTS
1.0 Introduction ............................................................................................................................... 7

1.1 Outsourcings Evolution........................................................................................................... 8
1.2 The New Marketplace................................................................................................................ 9
2.0 The Value of Outsourcing......................................................................................................... 9

2.1 Sourcing Objectives................................................................................................................ 11
2.2 Service Linkage....................................................................................................................... 11
3.0 Sourcing Management............................................................................................................ 13

3.1 Access Model .......................................................................................................................... 13
3.2 Optimization ............................................................................................................................ 14
3.3 Creation ................................................................................................................................... 15
3.4 Sourcing Maturity.................................................................................................................... 16
3.5 Engagement Structures.......................................................................................................... 17
3.6 Pricing...................................................................................................................................... 18
3.7 Vendor Relationships ............................................................................................................. 18
4.0 Conclusion .............................................................................................................................. 19
Appendix A:Acronym Key .................................................................................................................... 21
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FIGURES
Figure 1. Sourcing Options..................................................................................................................... 7
Figure 2. Outsourcing Generations: Historical Overview ..................................................................... 8
Figure 3. The Sourcing Delivery Spectrum ............................................................................................ 9
Figure 4. The Sourcing Value Spectrum .............................................................................................. 10
Figure 5. The Sourcing Matrix............................................................................................................... 10
Figure 6. Sourcing Objectives .............................................................................................................. 11
Figure 7. Sourcing Services.................................................................................................................. 12
Figure 8. Management Model................................................................................................................ 13
Figure 9. Access Model ......................................................................................................................... 14
Figure 10. Optimization Model .............................................................................................................. 15
Figure 11. Creation Model ..................................................................................................................... 15
Figure 12. Sourcing Maturity Life Cycle............................................................................................... 16
Figure 13. Engagement Structures....................................................................................................... 17
Figure 14. Pricing Structures ................................................................................................................ 18
Figure 15. Sourcing Relationships ....................................................................................................... 19
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1.0 Introduction
New Rules/Realities: The concept of the monolithic enterprise that owns all products, services and
channels is rapidly becoming a thing of the past; the destructuring of the hierarchical organization
gives way to an outsourced model to access capabilities.
For many enterprises, outsourcing plays a crucial role in achieving a broad variety of benefits in a timely
fashion. Outsourcing is viewed as a tool to pave the way for future adoption of technologies and new
business models. For example, 73 percent of those surveyed by Gartner said they rely on outsourcing to
deliver new technologies to their organizations. Looking forward, 36 percent anticipate adoption of virtual
organization models whereby external relationships will enable access to processes viewed as non-core.
In this future world, a shift will occur in the role of IT from doing to guiding. As a result, IS organizations
will prioritize IT strategy development skills among IT employees.
Meanwhile, high-growth opportunity in the IT services market has created unprecedented competitive
activity, with many new service providers entering the market daily. These new IT service providers
establish immediate market attention with aggressive marketing and niche strategies for differentiation.
The result is that 61 percent of enterprises will consider new competitors in their sourcing decisions.
Thus, the concept of the monolithic enterprise that owns all products, services and channels is rapidly
becoming a thing of the past. Increasingly, enterprises are evolving into an alternative model that is,
instead, a mesh of complex partnerships and outsourced services or processes. Successful enterprises
today are based on an extended or virtual enterprise model in which a critical business competency is the
ability to establish, implement and manage a comprehensive sourcing strategy. The sourcing strategies
that enterprises are adopting have a significant impact on the external services provider (ESP) market.
This impact includes:
What services are required?
How they are delivered?
What value is delivered?
Enterprises may adopt four primary approaches in a sourcing strategy: build, buy, cooperate and compete
(see Figure 1).
Joint venture
Cooperate
Build Buy
Internal IT Outsourcing
Full outsourcing
Best-of-breed/
selective outsourcing
Compete
Insource; brand service company
Source: Gartner Research
Figure 1. Sourcing Options
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Outsourcing is most relevant to the buy scenario. When considering their sourcing options, many
enterprises view outsourcing as a means to achieve business transformation while minimizing risk.
However, outsourcing comes in several forms: full outsourcing, best-of-breed or selective outsourcing. At
the same time, outsourcing concepts also are relevant in the other areas as an enabling model and
strategy.
1.1 Outsourcings Evolution
Tenets/Principles: Outsourcing generations evolve to reflect a combination of enterprises drive to

achieve business goals, benefit from current technology and satisfy buyer values.
As enterprises IT and business strategies have become steadily more intertwined during the past
decade, different phases in outsourcing have prevailed, moving from a cost-focused approach to one of
business value. More recently, the growth of the Internet has led to outsourcing offering speed to market
and scalability (see Figure 2).
Cost Business value Speed and scale
IT reduction IT expansion IT access
ERP Supranets
Mainframe Client/server Internet
Time sharing IT outsourcing Enterprise outsourcing
1970 1980 1990 2000 2010
ERP: Enterprise resource planning

Figure 2. Outsourcing Generations: Historical Overview
For many years, outsourcing was predominantly a means to manage and optimize enterprises ever-
growing IT infrastructures and ensure a return on IT investments or at a minimum, provide more cost-
effective operations. Today, as businesses move to Internet-based models, speed and skills have
become more important than cost efficiencies; and ownership of technology is giving way to utility
service provider models. Consequently, enterprises are struggling to rationalize two very different IT
strategies:
IT infrastructure that is largely internally built and managed by enterprises
IT infrastructure that is built and managed by ESPs for on-demand usage by enterprises
Outsourcing options span both worlds to address enterprise requirements for ownership and availability of
IT assets as well as access to business functionality. Understanding the unique generations and
characteristics of various outsourcing options is critical to developing a solid sourcing strategy.
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1.2 The New Marketplace
As enterprise value requirements drive IT behavior and performance expectations, outsourcing strategies
will be determined by these value requirements. With the emergence of the Internet, some new and
opposing market dynamics will influence the future of enterprise sourcing strategies.
In response to these market developments, Gartner has identified two critical forces for analysis that are
refereed to as the delivery spectrum and the value spectrum. The first to be discussed is the outsourcing
delivery spectrum (see Figure 3).
Enterprise Shared
environment environment
Traditional economy New economy

Customized environments Mass-customized environments
Intraenterprise Inter- or extra-enterprise
IT asset ownership IT access
Bricks and mortar Clicks and mortar
Private networks Public or open networks
On-demand, project-driven Expected, continuous
improvement improvement
Localized standards Shared standards
Figure 3. The Sourcing Delivery Spectrum
At one extreme is the enterprise environment, whereby end users seek outsourcing solutions that serve
them via direct, highly customized IT solutions. Typically, these solutions reside on a clients own
computing infrastructure, although ownership of assets by the outsourcer may occur. This environment is
characterized as serving hierarchical bricks and mortar enterprises of the traditional economy, where
capital investments in IT are driven by specific projects to serve the internal organizations IT-enabled
processes. At the other extreme is a shared environment, increasingly Internet-based, where mass
customization is the norm, thus enabling rapid deployment of mass-customized solutions and shortened
implementation times. This platform increasingly serves not only interenterprise operations, but intra- and
extra-enterprise operations as well. This environment is further characterized as serving the emerging
virtual enterprises or initiatives of the new e economy, where access to technology rather than
ownership of technology provides continuous availability and bandwidth to support Internet
transactions.
2.0 The Value of Outsourcing
Tenets/Principles: Enterprise value requirements will drive IT behavior and performance

expectations; outsourcing strategies will be determined by these requirements.
The other critical force for analysis is what Gartner refers to as the outsourcing value spectrum (see
Figure 4). At one extreme is IT efficiency, where the key concern is internally focused IT infrastructure
efficiency. Process optimization and enhanced time to market are key objectives. Measurements focus on
the cost efficiency of IT operations and the quality of service provided.
At the other extreme is business outcome, where the key concern is business effectiveness. Brand
dominance is the primary objective, and measurements focus on revenue enhancement and marketing
power.
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Business
IT efficiency outcome
Infrastructure efficiency Business effectiveness

Process; time to market Brand dominance
Cost-efficiency Revenue enhancement
Quality Power
Internally focused Externally focused
Figure 4. The Sourcing Value Spectrum
To determine the appropriate outsourcing strategy, enterprises must examine their desired delivery
requirements or strategies and the expected value to select the sourcing mix that best meets those
needs. To help enterprises understand their future options better, Gartner plotted the forces of value and
delivery to arrive at different scenarios, which Gartner refers to as The Sourcing Matrix that
encompasses four unique alternatives: management, access, optimization and creation (see Figure 5).
Business outcome
Optimization Creation
Value
Enterprise Shared
Delivery
Management Access
Enterprises sourcing strategies will

encompass all four models.
IT efficiency
Figure 5. The Sourcing Matrix
The basic tenets or principles of the sourcing matrix include:

Each of the models has a specific outcome (i.e., value) and approach for effectiveness (i.e., delivery).
Technology is the fundamental underpinning of business.
Fusion of business and technology enables speed, innovation and adeptness.
Technology is more visible on the lower quadrants of the matrix, yet is ubiquitous in the upper
quadrant, where technology is fused in the attainment of business objectives.
Axes are continua, rather than descriptors of mutually exclusive phenomena.
Enterprises must adopt distinct sourcing strategies to ensure optimum value or delivery for each
model.
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Tenets/Principles: The four outsourcing models (i.e., management, access, optimization and
creation) are nonexclusive; all models could and most likely will exist concurrently within an
organization.
2.1 Sourcing Objectives

New Rules/Realities: Alignment of technology and business, the transition to Internet-based
commerce, and the advancement of the IT utility or service provider models introduce new
objectives to organizations sourcing strategies.
When employing each of the four models, enterprises seek specific business objectives (see Figure 6):
Management: Enterprises foremost concern is to optimize the value of their capital investments via
the application of resources and processes to ensure a maximized return on IT assets.
Access: Enterprises do not want to own technology or assets or build up large IT staffs but, rather, will
procure the needed functionality to ensure maximized operating income.
Optimization: Enterprises are focused on their competitiveness how to most effectively avail
themselves of the best sources to maximize market share through applying best-in-class expertise to
their organization.
Creation: Enterprises are seeking wealth creation (i.e., return on equity) via achieving connected
relationships in virtual marketplaces or being connected in supply chains.
Business outcome
Exploit knowledge and human Connect knowledge and

Value
capital to maximize market share relationships in virtual markets
to maximize return on equity
Enterprise Delivery Shared
Management Access
Deploy and apply resources Procure functionality to
and processes to maximize maximize operating income
return on assets
IT efficiency
Figure 6. Sourcing Objectives
Action Item: Enterprises sourcing strategies must be under surveillance continuously to uncover when
business objectives are in transition or imminently changing; a sourcing strategy may require a migration
plan from one quadrant to another.
2.2 Service Linkage
New Rules/Realities: Enterprises sourcing strategies will necessarily encompass a close linkage
of services in one quadrant to services in another quadrant; services will evolve in time, migrating
from one area to another, to ensure innovation.
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Mapping the various IT services categories to the sourcing matrix reveals the complexity of offerings that
enterprises will procure to enable various outcomes (see Figure 7).
Optimization Business outcome Creation
Meta market maker

BPR/change Internet market maker
management BPO
I-BPO
Consulting BSP/PSP
ERP
Integration
Business process utility Exchanges/portals
Development
Commerce backbone
Enterprise Application outsourcing Shared
environment Application service provider environment
Enterprise operations
Help desk Network

Service provider
IT outsourcing (e.g., TSSP or SSP)
Desktop Hosting - Internet data center
Product support
IT Efficiency
Management Access
BPR: Business process reengineering

BPO: Business process outsourcing
BSP: Business service provider
I-BPO: Internet business process outsourcing
PSP: Process service provider
SSP: Storage service provider
TSSP: Technology service support provider
Figure 7. Sourcing Services
The management and optimization quadrants reflect the more familiar services to support the traditional
economic values. In the access and creation quadrants, new Internet-based services emerge that are less
mature but, nevertheless, are requisite if an organization is considering how to evolve an e-commerce-
based business. Management and access provide the IT infrastructure underpinnings to enable the
value that optimize and create respectively purport to deliver. In the future, enterprises will need to
segment their sourcing strategies to determine what services are needed to enable specific outcomes.
Gartner advises the following when the outsourcing option is chosen:
Business imperatives should lead in selecting the type(s) of service required.
Different evaluation criteria for ESPs must be applied in determining the sourcing strategy for different
service categories.
Multiple ESPs will be chosen to ensure best-in-class services provision.
Action Item: Enterprises must monitor technology innovation; as technology evolves, and greater maturity
occurs within marketplaces, new services will be added in the access and creation quadrants.
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3.0 Sourcing Management
Tenets/Principles: Management services will support critical IT infrastructure and back-office

systems for the future; the most successful, vital outsourcing will ensure that ESPs benefit from
opportunities to migrate into other value-add roles in the organization.
Management is the most familiar and the maturest quadrant on the sourcing matrix this is the IT
outsourcing that has developed during the past 10 or so years. Brick-and-mortar entities with significant
internal IT investments are highly likely to employ outsourcing in this sector because an outside party can
often provide management skills as well or better than the enterprise. A legacy of controlling the IT
operations with internal staff gives way to higher demands to ensure efficiency and cost effectiveness in
IT. At the same time these organizations struggle to give up control, they are often plagued by some type
of shortfall, including:
Resource constraints
Inability to hire or retain staff to keep pace with technology change
Inadequate processes (see Figure 8)
Business Bricks and mortar require IT infrastructure

reality Return on assets
Sourcing Low-cost provider; reliable service

strategy Technical expertise and IT skills rule
What buyers Predictability in cost and service

want Need to understand total cost of ownership
How vendors Leverageable, scaleable delivery operations

respond Forced standardization
Failure Little or no profitability is realized by vendor

factors Service does not meet business buyers expectation
Figure 8. Management Model
Initiatives to outsource, often led by CIOs and CFOs, emphasize finding the lowest cost provider that can
provide reliable service. Competitive requests for proposal (RFPs) further stimulate this objective.
Although ESPs attempt to leverage economies of scale, the threat is that the reduction mentality of both
parties limits IT innovation and investment. This framework of cost-focused measurement becomes one of
the potentials for downfall; while the ESP must ensure a profitable business, the enterprise seeks to
protect its own interest. A successful management relationship must ensure a good deal for both parties.
3.1 Access Model
New Rules/Realities: Enterprises purchasing access services will purchase what they need, when
they need it; vendor selection criteria must determine flexibility and adaptability in relationships or
contracting models, in addition to the scalability of environments.
Access represents the new world of Internet-based solutions where the concept of e-speed comes into
play speed is everything. This also is the world that replaces the capital-intensive, labor-intensive IS
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department of the brick-and-mortar companies with access via a just-in-time procurement model that
replaces ownership of IT (see Figure 9).
Business Speed to market entrance is everything

reality Mass markets and mass customization
Sourcing Just-in-time procurement model

strategy Outsource everything; own nothing
What buyers Cheaper; simpler; faster; flexible; good enough

want Low switching cost no hassle
How vendors Quick and easy solution

respond Pay-as-you-go for as-needed IT access or bandwidth
Failure Quality, technology failures or breach in security

factors No customer loyalty
Figure 9. Access Model
This model is one of mass customization. Insofar as a sourcing strategy is concerned, access indicates
the new organization model that outsources everything and owns nothing. This is the model adopted by
the dot-com companies and the Internet marketplaces, as well as the clicks-and-mortar spin-offs from
larger corporations seeking participation in the e-economy where pay-as-you-go processes dominate.
There is a necessity for this approach; all these entities are relying on connection with the vast network of
suppliers, partners and customers on the common medium of the worldwide Internet. These providers
assume considerable risk because enterprises will contract for far shorter terms (e.g., monthly as opposed
to annual contracts) with easy-in/easy-out terms. Because the business success relies on network uptime,
no tolerance exists for downtime. Access, as such, redefines the concept of mission-critical: mission-
critical means always available.
3.2 Optimization
New Rules/Realities: Sourcing strategies that seek to juxtapose aspirations for high value-add
services for enhanced competitiveness with objectives of low-cost delivery will invariably result in
little or no innovation via the outsourcing relationship.
Like the management environment, optimization serves bricks-and-mortar companies that have evolved
an internal IT strategy. These enterprises are approaching their sourcing strategies with the underlying
assumption that building market share and shareholder value is their primary reason for existing (see
Figure 10). In optimization, organizations evaluate what they will build internally and what they will
outsource. Their decision to outsource is generally motivated by their need to ensure enhanced
competitive advantage via high-value relationships that provide a core differentiator of knowledge capital
or world-class process. At the same time, the underlying drivers in this market are to create economies of
scale via low-cost delivery models. ESPs respond by forming exclusive relationships to deliver these
highly customized solutions that are focused on the business outcome for the single entity. Many inherent
risks exist, however, to making this model successful. The foremost risk is a lack of innovation over the
long term. The ESP is tied to an exclusive relationship with the expectation that as a result of its
service improved profits and greater efficiencies will result in business enhancement. However, the
finite opportunity of the relationship constrains the opportunity and, therefore, the amount of innovation.
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Ultimately, ESPs begin to focus on the complexities and delivery costs of the engagement. Enterprises
may exacerbate the situation by introducing competition to encourage innovation.
Business Shareholder value is king

reality Bricks and mortar require physical presence
Sourcing Competitive advantage via high-value relationships

strategy Invented here is first option then go outside
What buyers High-value relationships low-cost delivery

want Leverage my infrastructure
How vendors Promise profitability, margin enhancement

respond Exclusive relationships with risk assumption
Failure Failure to deliver value or innovation

factors Commoditization of or no value-add services
Figure 10. Optimization Model
3.3 Creation
Strategic Planning Assumptions: Through 2005, the adoption rate of the access and creation models will
permanently reshape IT provisioning, resulting in a shift of technology asset ownership to service
providers (0.7 probability). Through 2005, outsourcing will be replaced by an insourced service model,
resulting in a ramping up of organizations ownership and management of technology (0.3 probability).
The creation environment is characterized by a shared-delivery environment and an outcome-oriented
value proposition (see Figure 11).
Business Gold rush boom or bust NetWorld

reality Shared business networks to create wealth
Sourcing The business strategy is the sourcing strategy

strategy Create and connect the supply chain
What buyers Vision and strategy to access net-markets

want Off-the-shelf proven solutions; easy-on networks
How vendors Credibility; A grade business networks

respond Alliances or partnerships to deliver holistic solution
Failure Government anti-trust laws and regulation

factors Breach in security of information (i.e., customer)
Figure 11. Creation Model
This represents the emerging Internet-based e-marketplaces that revolutionize how commerce is
conducted in supply chains of buyers, sellers, partners and even competitors. Business takes place here
on shared business networks. This is a new value chain comprised of diverse but connected and
interdependent participants that seek mutual gain through greater efficiencies. Business time frames
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are greatly compressed. In this environment, the business strategy is inextricably linked to the sourcing
strategy, which provides the vision and strategy to enable the business network. Although this is a new
market, vendor references and enterprise confidence in the ESP are key factors. Creating the Internet
marketplaces will require a consortia of business partners capable of putting together the multiple
elements of these shared business networks, from vision or strategy to integrating the underlying
commerce backbone and managing the transactions. The value proposition will be to ensure the
compatibility of the member participants.
Action Item: In the creation of new businesses (e.g., Internet and meta-marketplaces), enterprises must
seek outsourcers capable of selectively forming value chains with best-of-breed technology and service
partners.
3.4 Sourcing Maturity
Conclusion: Enterprises will adopt the outsourcing model and relationship construct that
supports both the outcome (i.e., value) and the approach (i.e., delivery) for optimal results.
Understanding the relative maturity of each type of IT service that is available in the market enables
enterprises to establish reasonable expectations for the cost and quality of services to be delivered (see
Figure 12). As new services mature, methodologies and standard procedures can be repeatedly tried,
tested and refined.
Infancy Adolescence Midlife Maturity
Service
Creation performance
Optimization
Complexity
Access
Management
Price for
value
delivered
Time
Lack of Price pressure Economies Best practices

understanding Customer of scale Serious price
Bleeding-edge disillusionment Improved competition
technology Vendor customer Lower margins
One size investments knowledge Vendor
fits all or Methodologies Improved consolidation
overly emerge technology or Commoditization
customized methodology
Figure 12. Sourcing Maturity Life Cycle
Once service delivery has been perfected to the point of reliable, repeatable processes, the market starts
to mature, costs start to stabilize and margins generally drop. Competition also will stimulate maturity. As
more ESPs enter a market and perfect best practices, the service line becomes commoditized and costs
decrease further.
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Although management services have been around the longest and are often viewed as mature, they are
characterized as moving from adolescence phase into midlife, where steady improvements in processes
and methodologies are affording greater economies of scale.
Optimization services are largely in the adolescence phase. Price pressures are emerging, and the formal
methodologies to achieve customer satisfaction are being established.
Access and creation, both in their infancy, represent two very different but mutually dependent services.
Access will most likely move more quickly into the adolescence and midlife phases. It is the foundation on
which creation services will be built.
3.5 Engagement Structures
Tactical Guideline: Every engagement between an ESP and a service recipient is unique and must
be developed to support the specific objective of the engagement; there is no one-size-fits-all
engagement structure.
What can enterprises anticipate from the different outsourcing models as far as their supplier relationships
are concerned? The traditional direct client-vendor relationship is no longer the norm (see Figure 13).
Business outcome
One-to-one One-to-many; many-to-many
Prime (i.e., account control) Service aggregator
General contractor Market or industry consortia
Single point of accountability Service providers enable
value chain
Enterprise Shared
Management Access
One-to-one One-to-many
Prime with subcontractor Prime with alliance partners
Best-of-breed, selective or Market-based consortia
full outsourcing
IT efficiency
Figure 13. Engagement Structures
Each of the four quadrants in Figure 13 is characterized by a unique engagement structure to enable core
objectives:
Management: A highly customized, one-to-one engagement strategy exists, typically involving a prime
contractor that subcontracts elements of the work to other provider(s).
Access: Mass customization in this model provides a one-to-many relationship. A prime provider
model or service consortia strive for a highly scalable solution.
Optimization: Two primary engagement models exist a one-to-one and a one-to-many model. A
prime contractor often leads the engagement, but the future prospect is for greater consortia-based
engagement models.
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Creation: Multiple relationship levels are possible in the creation arena: a one-to-one engagement
occurs in the vision and strategy phase, but it gives way to one-to-many and many-to-many as the
Internet market evolves. Consortia models emerge.
3.6 Pricing
New Rules/Realities: As value expectations increase, outsourcers will embed the risk associated
with providing that value into the pricing structure.
Pricing structures for the different models of the sourcing matrix are varied, tying in closely with the
business objectives (see Figure 14).
Business outcome
Pay for performance Business transaction
Deliverables-based Per business transaction
Milestones and Equity investment
bonuses or penalties (i.e., in lieu of payment)
Enterprise Shared
Management Access
Predictable pricing Rental approach
Utilization or capacity-based Pay-as-you-go; pay-as-you-grow
(e.g., MIPs or DASD) Bandwidth (i.e., scaling)
Per seat or incident Per user
Tiered levels of support
IT efficiency
Figure 14. Pricing Structures
As Figure 14 illustrates, the four basic pricing structures are:

Management: Enterprises seek predictability in pricing, resulting in utilization/capacity-based or
usage-based pricing strategies, which support objectives to maximize return on assets.
Access: The highly scalable model that enterprises seek via access is accomplished through a rental-
approach pricing scheme. Paying for usage, on an as-needed basis, ensures that enterprises
maximize their operating income.
Optimization: Pay-for-performance is the pricing model for optimization. Different pricing

measurements will be deliverables-based or based on the achievement of milestones where bonuses
or penalties apply.
Creation: The underlying concept of this quadrant is wealth creation and return on equity. The pricing
model will be based on the business transactions that occur on the marketplace, either on a per-
transaction basis or on an outcome. In some cases, ESPs will receive an equity investment in lieu of
payment.
3.7 Vendor Relationships
Imperative: As enterprises formulate their sourcing strategy, they must determine what levels of
business value and innovation they expect from their service provider; higher levels of
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relationship complexity will require diligence to identify and manage mutually agreed on goals and
objectives.
If sourcing strategies are intended to support business goals, it behooves enterprises to consider carefully
what they want from their service provider relationship. All outsourcing relationships are not created
equally. Within each of the four worlds of outsourcing, three sourcing relationship models are viable (see
Figure 15).
Competitive-
advantage-focused
Frontier
Effectiveness-
focused
Business Innovation
Value
Efficiency- Enhancement
focused
Utility
Relationship Complexity
Figure 15. Sourcing Relationships
Often, the tendency is to idealize the potential for a frontier relationship but actually be unprepared for
that level of commitment. Enterprises and service providers must be in agreement as to their relationship
goals and work diligently to achieve the intended innovation and business value.
Gartner provides classifications for outsourcing relationships, including:

Utility: Efficiency is of paramount importance. This relationship primarily seeks to deliver IT cost
reduction with the goal of maintaining consistency in the delivery of services.
Enhancement: Effectiveness is of paramount importance. This relationship primarily seeks to deliver
productivity; an enterprise's performance, as compared with its competitors, will improve, resulting in
some movement toward predetermined business goals.
Frontier: Competitive advantage is the key objective. This relationship primarily seeks to deliver
innovation and new business opportunity in a partnership relationship, often changing the very nature
of the basis on which an enterprise competes.
4.0 Conclusion
Outsourcing to multiple suppliers will become the predominant model in enterprises sourcing strategies.
Enterprises outsourcing strategies will take advantage of four distinct and unique models:
Management
Access
Optimization
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Creation
Ultimately, enterprises will adopt the outsourcing model and relationship construct that supports both the
outcome (i.e., value) and the approach (i.e., delivery) for optimal results.
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Appendix A: Acronym Key

BPO: Business process outsourcing
BPR: Business process re-engineering

BSP: Business service provider
ESP: External services provider
I-BPO: Internet business process outsourcing

PSP: Process service provider
RFP: Request for proposal

SSP: Storage service provider
TSSP: Technology service support provider
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The Future of Outsourcing

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The Future of Outsourcing

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R-12-5500 Strategic Analysis Report

A. Young, T. Berg 9 May 2001

The Future of Outsourcing

1.0 Introduction ............................................................................................................................... 7

2.0 The Value of Outsourcing......................................................................................................... 9

3.0 Sourcing Management............................................................................................................ 13

4.0 Conclusion .............................................................................................................................. 19

Appendix A:Acronym Key .................................................................................................................... 21

Tenets/Principles: Outsourcing generations evolve to reflect a combination of enterprises drive to

IT reduction IT expansion IT access

Time sharing IT outsourcing Enterprise outsourcing

1970 1980 1990 2000 2010

ERP: Enterprise resource planning

1.2 The New Marketplace

Traditional economy New economy

Tenets/Principles: Enterprise value requirements will drive IT behavior and performance

Infrastructure efficiency Business effectiveness

Enterprises sourcing strategies will

The basic tenets or principles of the sourcing matrix include:

2.1 Sourcing Objectives

Exploit knowledge and human Connect knowledge and

Meta market maker

Help desk Network

Desktop Hosting - Internet data center

BPR: Business process reengineering

3.0 Sourcing Management

Tenets/Principles: Management services will support critical IT infrastructure and back-office

Business Bricks and mortar require IT infrastructure

Sourcing Low-cost provider; reliable service

What buyers Predictability in cost and service

How vendors Leverageable, scaleable delivery operations

Failure Little or no profitability is realized by vendor

Business Speed to market entrance is everything

Sourcing Just-in-time procurement model

What buyers Cheaper; simpler; faster; flexible; good enough

How vendors Quick and easy solution

Failure Quality, technology failures or breach in security

Business Shareholder value is king

Sourcing Competitive advantage via high-value relationships

What buyers High-value relationships low-cost delivery

How vendors Promise profitability, margin enhancement

Failure Failure to deliver value or innovation

Business Gold rush boom or bust NetWorld

Sourcing The business strategy is the sourcing strategy

What buyers Vision and strategy to access net-markets

How vendors Credibility; A grade business networks

Failure Government anti-trust laws and regulation

Lack of Price pressure Economies Best practices

As Figure 14 illustrates, the four basic pricing structures are:

Optimization: Pay-for-performance is the pricing model for optimization. Different pricing

Gartner provides classifications for outsourcing relationships, including:

Appendix A: Acronym Key

BPR: Business process re-engineering

ESP: External services provider

I-BPO: Internet business process outsourcing

RFP: Request for proposal

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