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Own vs. Outsource: The New Dilemma

by Joshua Greenbaum

August 11, 2009

Mix-and-match is part of SAP NetWeaver’s DNA, and the blending of services architectures and software as a service can have its ultimate expression in SAP NetWeaver.
 

As the twentieth century came to a close, the consummate issue for business and IT was build vs. buy. Do companies continue to invest in tools and databases and armies of programmers in order to build what they need, or do they buy packaged solutions from a company like SAP and hope to lower their total cost of ownership (TCO) while improving their efficiency and competitiveness?

As the twenty-first century unfolds, a similarly consummate issue is emerging. Do companies continue to invest in packaged software and armies of systems administrators in order to maintain the packaged solutions that they’ve bought from a company like SAP, or do they start outsourcing parts of their IT operations — to SAP, among others — and hope to lower their TCO while improving their efficiency and competitiveness?

The more it changes, the more it remains the same, right?

The eternal quest for lower TCO and greater operational efficiency and competitiveness has brought outsourcing, applications hosting, and “software as a service” back from the wilderness of neglect and bad business models into the forefront of discussions on how user organizations spend their IT dollars. And while the build vs. buy battle of the twentieth century proved to be highly disruptive to a broad range of software vendors, the software as a service battle of the twenty-first century may prove to be a smoother transition for vendor and customer alike.

Why will that transition be relatively smooth? Because companies like SAP understand that they need to be an essential part of this new paradigm. Or to put it a little more succinctly: Outsourcing, software as a service, and hosting can genuinely lower TCO and improve efficiency and competitiveness, but only if the vendor is in charge.

This kind of thinking is propelling SAP back into services in a big way. SAP’s efforts in outsourcing are growing — in particular, the practice of business-process outsourcing — while its much-touted on-demand CRM will see the light of day any time now. The success of companies such as Salesforce.com — and the somewhat childish threats from that company’s CEO that his business model can be beat up SAP’s business model — are fine-tuning a lot of strategy at SAP.

The opportunities that SAP NetWeaver presents in being both a technology and a business-process platform are also focusing SAP’s efforts: The ability to offer business processes as services in an enterprise services architecture (ESA) that is based on SAP NetWeaver will make it much easier for SAP to offer a rich palette of outsourced services to its customers.

Although it’s linguistically confusing to talk about ESA and outsourced services in the same sentence, they complement each other nicely. Individual enterprise services can be readily combined and offered as outsourced business processes. In other words, having an ESA will make it much easier for SAP to offer a broad range of business-process outsourcing services.

Which brings us back to our consummate issue: to own or to outsource.

If you look at it from the business perspective, the services side of software really speaks to the eternal question of core competency. Because at the end of the day the economic questions about own vs. outsource really boil down to whether what you’re buying makes you a better company and a better competitor. “Better” is the key word here: If a piece of software makes you only as good as your competition, it’s a non-strategic piece of software. That means it may belong in the outsource pile alongside your payroll, event management, and other functions that you don’t need to be doing any better than your competitors.

But if that software makes you a better competitor, better partner, better customer, then maybe you’re better off owning it and running it, so you can learn from your mistakes and successes, and twist the dials occasionally to make sure it runs even better.

What this business perspective means is that the logical answer to own vs. outsource should be “yes” to both. Some processes and functions you’ll want to spin off into a services mode, while others you’ll want to own and nurture and grow as your competitive core competencies.

This is where SAP NetWeaver will play a powerful role. Mix-and-match is part of SAP NetWeaver’s DNA, and the blending of services architectures and software as a service can have its ultimate expression in SAP NetWeaver. In a pure services architecture, any of those mundane functions that are no longer part of your core competencies can be easily and seamlessly spun out from your IT department and handed off to an outsourcing partner with no impact on usability or on throughput.

As loosely coupled services, it won’t matter to your users whether your IT department is running accounts payable or SAP’s outsourcing partner is running the software: The portal interface will look the same, the functionality will be the same, and the end result will be the same. Just the cost structure and service mode will be different — things that only your CIO and CFO will know for sure.

The truth is that build vs. buy was never an either/or decision. And own vs. outsource won’t be one either. The difference between then and now is that building and buying were essentially an abomination to each other, and the result was more of those infamous silos of information that the IT and business world have been trying to get rid of ever since. But in the world of SAP NetWeaver, own vs. outsource — and buy vs. build, for that matter — will coexist in an elegant and highly functional way. The result will be a radically different way to think about what is strategic and what is non-strategic, a different way to think about the role of software in the organization, and a different way in which companies like SAP will sell, and service, the products they develop.

When it comes to own vs. outsource, the more things change, the more things will never be the same again.

Joshua Greenbaum is a market research analyst and consultant specializing in the intersection of enterprise applications and e-business. Greenbaum has more than 15 years of experience in the industry as a computer programmer, systems analyst, author, and consultant. Before starting his own firm, Enterprise Applications Consulting (www.eaconsult.com), he was the founding director of the Packaged Software Strategies Service for Hurwitz Group.

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