Information Technology Outsourcing

Information Technology (IT) outsourcing discussions in larger organizations seem to gravitate towards one of two approaches, either horizontal or vertical. Both approaches can provide significant value when used in the right situations. This value comes from the outsourcing provider's ability to leverage scale, best practices, talent, intellectual property and the ability to continuously improve.

The horizontal approach leverages primarily scale and best practices, outsourcing layers in IT infrastructure. This is generally from an enterprise perspective. One provider may end up with hardware and operations, another provider with network management, another with desktop management, and still another with application management. The horizontal approach can provide significant near term cost reduction. This value comes from the outsourcing providers ability to leverage scale and best practices. Scale may come from the size of the providers processing utility or ability to leverage supplier relationships. Best practices are usually centered on operations for respective layers in the IT architecture. The horizontal approach seems to work best when there are a large number of interfaces to manage - both systems and people. However, unless some kind of continuous improvement is built into an outsourcing relationship, horizontal outsourcing arrangements are often dissolved near the end of their term.

Vertical IT outsourcing is often done by business unit or major application area. A single provider has full accountability and responsibility for infrastructure, operations, and application management, for that application or application area. A center of competency built around a specific application or suite of applications can provide more leverage for that business area than generic best practices. Leverage in the vertical approach may also come from economies of scale and best practices in operations, but more often from the leverage of experience and collective investment in an application. While this is often done in an ASP environment, it can also be done in other outsourcing models. A vertical application provider has extensive experience not only with the application, but its use in multiple markets and with multiple customers. Assuming that you want to customize an application for competitive advantage, the software provider may be best equipped to do this and maintain those customizations through future releases - a concept known as release currency. Common management practices for base and custom software components coupled with deep application experience can provide significant cost leverage and continually build value over time.

Many mission critical applications also have unique support and operations requirements. Business resumption is one area that is likely to vary significantly from application to application, particularly if the applications were developed in different technology cycles or by different organizations. Leveraging an operations and support group with specialized application experience can provide significant cost leverage and responsiveness.

Horizontal and vertical IT outsourcing approaches can be combined, but this may create support issues between providers. A single point of accountability of IT support may work best for your organization.