“Trust is good, control is better”
July 20, 2010
An interview with Professor Dr. Armin Heinzl, University of Manheim, Professor of General Business Administration and Business Informatics.
Professor Heinzl, are companies only interested in costs when deciding whether or not to outsource their ICT?
Professor Heinzl: When I ask my students, I get three answers: saving money, saving money and saving money. Financial advantages are the main reason companies decide to outsource their IT. Still, companies shouldn’t forget about performance levels. They need to ask themselves where the additional added value in outsourcing lies. Like transparency. Service levels and costs are the main decision-making criteria for companies interested in outsourcing. They provide greater transparency as to what the company is doing and make it possible to run things efficiently. I’ve also seen cases where user companies in certain situations are willing to accept higher costs.
Professor Heinzl: When I ask my students, I get three answers: saving money, saving money and saving money. Financial advantages are the main reason companies decide to outsource their IT. Still, companies shouldn’t forget about performance levels. They need to ask themselves where the additional added value in outsourcing lies. Like transparency. Service levels and costs are the main decision-making criteria for companies interested in outsourcing. They provide greater transparency as to what the company is doing and make it possible to run things efficiently. I’ve also seen cases where user companies in certain situations are willing to accept higher costs.
Who voluntarily pays more money? Doesn’t that defeat the purpose?
Professor Heinzl: In the US, I’ve encountered financial service providers who were ready to pay more money instead of insourcing their IT. And there were logical reasons behind their decision. Fast integration was critical when taking over a competitor. If a service provider is able to consolidate quickly, it makes sense to go with the faster option instead of the one that is more cost-efficient. Fast integration of IT operations and back office activities create extensive synergy effects and has a positive impact on the stock price, which creates capital for new takeovers.
Professor Heinzl: In the US, I’ve encountered financial service providers who were ready to pay more money instead of insourcing their IT. And there were logical reasons behind their decision. Fast integration was critical when taking over a competitor. If a service provider is able to consolidate quickly, it makes sense to go with the faster option instead of the one that is more cost-efficient. Fast integration of IT operations and back office activities create extensive synergy effects and has a positive impact on the stock price, which creates capital for new takeovers.
Many ICT service providers say that higher quality is another reason for outsourcing.
Professor Heinzl: Better service quality and a better service approach are also benefits of outsourcing. These features tend to not be as strong at internal IT departments, since they have a “monopoly on the market.” External service providers on the other hand should think of quality as a given. If it isn’t there, word is going to get around. You can imagine what that means.
Professor Heinzl: Better service quality and a better service approach are also benefits of outsourcing. These features tend to not be as strong at internal IT departments, since they have a “monopoly on the market.” External service providers on the other hand should think of quality as a given. If it isn’t there, word is going to get around. You can imagine what that means.
Does higher quality automatically lead to innovation?
Professor Heinzl: Companies that focus on IT need to be more involved with new technology and should therefore be able to give their customers cost advantages more quickly through using this new technology. It’s the only way for companies to distinguish themselves on the market. However, innovation is not a given from which customers always benefit. Customers who constantly push costs and therefore their service provider’s margins can’t expect them to consistently provide innovation.
Professor Heinzl: Companies that focus on IT need to be more involved with new technology and should therefore be able to give their customers cost advantages more quickly through using this new technology. It’s the only way for companies to distinguish themselves on the market. However, innovation is not a given from which customers always benefit. Customers who constantly push costs and therefore their service provider’s margins can’t expect them to consistently provide innovation.
How important is trust?
Professor Heinzl: Trust is a necessary factor in a partnership, but you need more than that. Trust needs to be established early on. It needs to be established during the bidding phase and continue throughout the due diligence process. When operations start, the service level initially slips below where it was before the transition. That means the first thing a service provider needs to do is bring it back up. Once that happens, they can focus on meeting customer expectations. How much trust has been established becomes apparent during the critical initial phase after the transition. Later on it’s just like in any other business relationship: trust is good, control is better. It never hurts to take a look at the service level agreements now and again.
Professor Heinzl: Trust is a necessary factor in a partnership, but you need more than that. Trust needs to be established early on. It needs to be established during the bidding phase and continue throughout the due diligence process. When operations start, the service level initially slips below where it was before the transition. That means the first thing a service provider needs to do is bring it back up. Once that happens, they can focus on meeting customer expectations. How much trust has been established becomes apparent during the critical initial phase after the transition. Later on it’s just like in any other business relationship: trust is good, control is better. It never hurts to take a look at the service level agreements now and again.
