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Outsourcing options on the rise

More companies are exploring ownership arrangements such as joint ventures with independent providers.

By ASSOCIATED PRESS
Published May 30, 2006

Most companies who outsource farm out the work to independent providers, but a growing number are taking an ownership stake in the relationship.

According to consulting firm DiamondCluster International Inc.'s 2005 Global IT Outsourcing Study, the number of buyers that have taken on some ownership position in an outsourced relationship has doubled to 34 percent from 17 percent in 2004. Ownership can take the form of a joint venture, fully owned subsidiary or build-operate-transfer, or BOT, arrangement.

To be sure, the move toward alternative arrangements is cyclical and observers don't expect them to overtake traditional outsourcing arrangements. Nonetheless, more companies are taking note of the alternatives, particularly as participants look for more ways to generate revenue and spread risk.

"Every organization really needs to look at it and decide what's right for them," Tom Weakland, a partner with DiamondCluster, said about these arrangements.

One of the more common forms of ownership is a joint venture. In this model, the companies create a new legal entity that can create revenue and tax advantages for the company, the outsourcer and the new partnership. In a joint venture, it's easier to create a shared-risk, shared-reward environment than it is with a typical service-level agreement. It provides greater transparency for the buyer of outsourcing services.

"Beyond the desire to exert a high level of control, there is often the view that these services can ultimately be commercialized to offer services to other organizations," said John Willmott, chief executive of NelsonHall, a research and consultancy firm specializing in business process outsourcing analysis.

Of course, when both companies have a financial interest in a company's success, they tend to pay more attention to the endeavor. That was the logic behind TXU Corp., a Dallas utility company's decision to take a stake of less than 3 percent in Capgemini Energy Limited Partnership, a joint venture launched in 2004 between it and consulting and outsourcing company Capgemini, a Paris company with U.S. headquarters in New York and Dallas.

"It's good for both companies to be financially involved in the success of this effort," said Chris Schein of TXU, "and that certainly was a key component in our decision to make that 3 percent investment."

[Last modified May 30, 2006, 06:03:32]