It has its detractors, but in reality there is little evidence to suggest that the outsourcing market is doing anything other than booming. Research firm TPI has found that Europe and Asia-Pacific are both still experiencing strong outsourcing growth. Outsourcing activity in Europe for the first quarter of 2007 was up by two-thirds compared to 2006, with $9.7bn-worth of contracts signed, while Asia-Pacific experienced a 30 per cent rise to $2.1bn. Outsourcing is still, and will continue to be, a boom market. However the nature of the outsourcing deals is changing.

In the past in the financial services sector, reducing overheads to maintain a competitive edge or simply staying afloat was the underlying force behind every outsourcing decision. In some respects outsourcing was seen as a way of passing on a problem that was too expensive and resource-draining for the company. Financial services organisations have been guilty in the past of viewing outsourcing primarily, if not solely, from an operational perspective.

Nowadays, a more mature and wiser outsourcing market has emerged. Companies no longer see cost as the principle driver behind outsourcing deals - more and more companies are viewing outsourcing as a way to add value to their organisation as well as gaining additional domain and technology expertise. By employing a supplier with high-level industry knowledge to develop complex technology that transforms or re-engineers a key business process or function, the end user aims to change the operation so that both the performance improves and the cost decreases.

Outsourcing the development of high-end technology, which will re-engineer the company’s key processes – transformational outsourcing - is a new and exciting development in the outsourcing marketplace. Analysts describe transformational outsourcing as “an emerging form of IT outsourcing that combines cost saving with the potential for enhanced IT flexibility”.

One example of transformational outsourcing is within banks and financial services organisations, which outsource software aimed to improve or re-engineer their front line operations. By employing a supplier with the domain and technology expertise to deliver mission critical software, the banks accelerate process transformation and build software that is a vital part of their operations.

When outsourcing is approached from a transformational perspective, the economic advantages are a beneficial result rather than an objective. The key aim is to accelerate and finance process transformation. This is geared around key business needs such as strengthening front line operations, accelerating speed to market, closing the skills and knowledge gaps and primary technology demands such as building a strong and flexible infrastructure. A recent IDG study on transformational outsourcing found that firms are increasingly using transformational outsourcing as a way to introduce strategic flexibility into their business models.

The transformational model implies another level of the vendor / end-user relationship. It is more of a partnership in which an outsourcing provider can demonstrate flair in thought leadership, pro-activity, domain expertise and an ability to adapt and respond to the end user’s business requirements. This approach can be used in any sort of outsourcing practice, from high-end applications through to complex IT systems and business process outsourcing.

With the rise of transformational outsourcing has come the realisation amongst end users that outsourcing isn’t a matter of simply handing over a problem to a supplier. The transformational model is different. As research firm TPI explains, transformational outsourcing is “the process of effecting continuous strategic change and tying the results of the outsourcing initiative to strategic business outcomes. It is a collaborative, risk- and gain-sharing relationship among the organisation and its service providers to drive enterprise transformation and achieve significant business process improvements.” By harnessing the outsourcing process, and working in tandem with the supplier towards the same goals, transformational outsourcing can have a strategic effect on achieving company goals.

There are both huge benefits and potential pitfalls when outsourcing such development to a supplier. On the plus side, the promise of rapid, substantial, sustainable improvement in enterprise-level performance, as well as an improvement on the bottom line has tempted end users to consider transformational outsourcing.

However, it is essential to follow best practice guidelines when considering a transformational outsourcing solution. As in any outsourcing deal, finding the right supplier is vital. The difference in transformational outsourcing being that the supplier must be trusted absolutely to know the end user’s business, the systems that are used and the operations and processes that are to be transformed. The domain-level expertise has to be one step above traditional outsourcing because of the fact that core processes are actually being transformed, rather than amended or simply being managed.

One other issue that must be thought through within transformational outsourcing is the need for the end user as well as supplier to look at their relationship as a business model, that benefits both partners, and not just a deal. It is very important that the strategic purpose should be kept at the centre at all times.

The advantages of transformational outsourcing come about as a result of intelligent outsourcing processes. When transformational outsourcing is put in place, monetary benefits are an inevitable outcome, but it is the improved value to the end user’s organisation and processes that is the most significant benefit to the end user.

By Sergey Karas, Vice-President, Luxoft.

For more information, please visit www.Luxoft.com