"Third generation" IT outsourcing contracts are increasing, and there won’t be a need for a "fourth generation", predicts Coeus Consulting

25 November 2014

The emerging trend of large organisations entering into "third generation" IT outsourcing contracts shows that significant lessons have been learnt from the problems associated with the first generation and second generation approaches of the past 20 years.

But while the new "third generation" approach of having a range of suppliers and in-house services brings its own problems, they are not inherent enough to lead to a "fourth generation" model in the foreseeable future, predicts IT outsourcing specialists Coeus Consulting.

In its new white paper – “IT Outsourcing: Third Time Lucky?” - Coeus Consulting looks into the failures of first and second generation IT outsourcing, which have led to the increasing adoption of third generation outsourcing models.

One of the key shortcomings of first and second generation outsourcing is that there is often a large gap between what the corporate customer expect and what suppliers actually deliver.

The original first generation outsource deals were mainly intended to save money, and pushed the risk of delivery onto one large external supplier who delivered the whole IT infrastructure.

As IT services have become even more critical to core business delivery over the past 15 years, this pushed organisations to use a more agile "second generation" multi-sourcing model based on choosing the best supplier for each IT service. 

This has produced its own challenges, including an unexpected increase in the timescales and costs of the end-to-end IT service delivery functions. This is due to the higher-than-expected costs by not governing, managing and coordinating activities across multiple internal and external IT service delivery functions effectively.

James Cockroft, Director of Coeus Consulting and the report’s co-author, said: “Third generation sourcing utilises the best sourcing model relevant to each specific IT service, defined as ‘right-sourcing’, it aims to combine the benefits of previous outsourcing models, and optimise the transformational potential from outsourcing IT services.

"It also seeks to reduce the coordination and governance problems of second generation models with the adoption of clear operating models and robust integration functions, such as SIAM (Service Integration And Management).”

The major benefits for organisations for moving to third generation IT outsourcing models are:

  • The business benefits from flexibility as they are not locked into using one supplier.
  • The business can tender competitive offers from various suppliers on the basis of service as well as price – meaning the customer is not limited to only large enterprise-level suppliers, and instead has access to smaller specialist suppliers.
  • Commoditised services can have shorter term contracts (allowing greater flexibility).
  • The business is free to choose the best supplier for each outsourced service.

However, this third generation approach can cause inherent difficulties too, including:   

  • The original challenges around skills and retention will still exist and possibly will pose one of the biggest challenges for third generation contracts.
  • When using multiple suppliers, some may be wary of entering into contracts which require close cooperation with competitors.
  • When using multiple suppliers, rather than one outsourcer, the number of moving parts which need to be monitored significantly increases.

However, Catherine Randles, Managing Consultant at Coeus Consulting and co-author of the report, adds “Despite these difficulties third generation outsourcing can successfully provide the best blend of internal capability and external multi-sourcing to ensure delivery of flexible and cost effective IT services which align with business priorities.

“Third generation outsourcing is a major improvement on earlier attempts - whether through outsourcing everything to one company, or outsourcing everything to a range of suppliers. 

“While it is not perfect, using the lessons learnt over the last 20 years, third generation outsourcing should be third time lucky…”

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