In market economies, organisations increasingly specialise on core activities and choose to use partners for the provision of products and services that were once delivered using in-house resources.
In the US, the trend towards outsourcing non-core activities is more advanced than in Australia, where many markets were, and in some cases still are, more heavily regulated than the US. Many Australian companies are, however, now showing a propensity to outsource like their American counterparts.
For example, at the turn of the 20th century, Ford was a highly vertically integrated organisation. Raw materials typically entered one end of Ford's factories and emerged as an automobile at the other end. As the automotive market became more competitive, manufacturers such as Ford became increasingly specialised. They began to create separate divisions that focused on business processes centred around parts, engines, brakes and so forth. Over the years, suppliers emerged that offered to carry out many specialised business processes more efficiently and effectively than Ford and other automotive manufacturers. Hence, in order to remain competitive, Ford and other automotive manufacturers outsourced many of their business processes.
The automotive industry has since exhibited a high propensity to outsource; not only the manufacturing of parts, but also other functions such as ICT (General Motors and EDS, for example), payroll processing, logistics and others. The same trend toward outsourcing is occurring in many other industries in countries with mature market economies, though often at different rates of adoption.
Today, the use of Internet technology to underpin a growing number of business activities is further accelerating the process of outsourcing non-core activities. This can be explained by the fact that Internet technology lends itself to the dynamic dissemination of information that can be used to trigger events. In other words, companies and their partners can share dynamic information and leverage this information in a manner that meets business objectives by communicating over networks.
The growing focus on core competencies combined with technology that can facilitate this focus is leading to the emergence of business ecosystems. These ecosystems are characterised by the linking of disparate specialised organisations that typically leverage Internet technology in order to disseminate and act upon market information.
One key component of any business ecosystem is IT infrastructure. Indeed, many of today's large organisations choose to outsource their IT infrastructure.
IT outsourcing is beginning to mature in Australia. In the 1990s, the business grew rapidly with some years witnessing 60 per cent growth on the previous year. In the early part of this decade, year-on-year growth rates are expected to be in the region of 10 per cent. Most organisations with the highest propensity to outsource have already done so. Today, there are few large financial institutions and state government departments that are yet to outsource at least some of their IT activities.
At present, the IT outsourcing market in Australia is worth approximately $3.8 billion and will reach around $6.3 billion by 2006. The table (below) shows the size of the IT outsourcing market in 2001 and its expected size in each year until 2006.
However, the nature of IT outsourcing is changing. Increasingly, organisations seek to gain measurable business benefits from their IT investments. Correspondingly, they now frequently seek the delivery of specific business benefits from IT outsourcing vendors. This has led to the emergence of overlaps between traditional IT outsourcing and business process outsourcing. Furthermore, many traditional outsourcing vendors have launched "business services". Business services are services that deliver specific business functionality to a client over a network from a remote site, on a "one-to-many" basis. For example, a service provider may offer business functionality to human resources managers at a fixed price. Although this type of offering depends on IT, it is increasingly positioned by major IT suppliers as a business offering rather than a technology offering.
Over the next few years, IDC expects networking technology to underpin the outsourcing of a growing number of business processes that are considered to be non-core by Australian organisations. Increasingly, providers will adopt a one-to-many form of service provision in order to offer cost-effective services to smaller organisations.
Indeed, organisations will find themselves at the centre of their own business ecosystems, which will provide them with the support and ancillary services that are necessary in order to ensure that they remain efficient and competitive. This model will ensure that organisations own less in terms of physical and working capital. For this reason, they will be in a position to respond more rapidly to changing market conditions and consequently enhance their competitive positions.
From a channel perspective, IDC expects to see delivery partners becoming a key component of business ecosystems. Channel players will play a key role in providing information to enterprises on market conditions. This information will help enterprises to manage inventory levels and to ensure that products and services meet market needs as closely as possible. Enterprises will increasingly offer channel players the opportunity to leverage expertise and skills to increase their own market presence in key segments.
Andrew Milroy is director of consulting, software and services at IDC Australia.