Outsourcing I–The "Why" Question

A little while ago, I was asked to give a presentation to CEOs on outsourcing. The audience wanted to know about adopting outsourcing for their companies; making use of its promise while avoiding its pitfalls. It seemed to me (unimaginatively, I must admit) that the whole thing boiled down to four fundamental questions - the why, the what, the who and the how.

I decided to expand the presentation into a series of blog posts, one per question.

The Why Question

Why outsource? Given that a trillion-dollar industry has crowded a lot of people into Bangalore and made more than one driver rich, it seems a little late to ask this question. However, this isn't really about outsourcing being good or bad per se. Bloggers like us love to wallow in theoretical questions; companies usually want answers to more prosaic stuff.

The question really is, why should a company be looking for an outsource partner?

 

I've divided the universe into two simple flavours – Tactical and Strategic. These two kinds of outsourcing, I feel, cover the most important differences in approach. The truth is, outsourcing isn't equal for everyone. Some companies use outsourcing as a game changing strategy, others more as a convenient efficiency enhancer. There are big benefits to both, but they are not interchangeable. One kind of outsourcing is noticeably different from another, and the wrong reason to choose one or the other can often lead to very poor outcomes.To keep things uncomplicated, let me define what I mean by strategic and tactical in this post.

• Tactical – project centric or short term contracts, typically three years or less, techniques to win visible battles
• Strategic – long term contracts, typically five years or more, positioning for strength in winning the long term war

I've chosen three years deliberately; given today's rate of technology change, this is pretty much the horizon beyond which only guesswork and consultants lie. Using today's knowledge to solve problems beyond this horizon will usually lead to poor results.

Tactical Outsourcing

Tactics, in other words, is an approach to solving visible or anticipated problems. As may be expected, this is the most popular form of outsourcing and many most companies are now evolving to make this the norm. Tactical outsourcing is good at addressing problems in this horizon – usually to fill gaps that internal IT has in expertise, time or resources. Almost every major American company today has – in addition to internal IT - relationships with some trusted outsourcing companies that will be used to solve these tactical problems. As a result, IT teams have shrunk, and companies are better able to respond to IT challenges. One starts of with purely opportunistic relationships with many different vendors, but most companies soon narrow down to a few, or even one, trusted outsource partner.

Some common situations where tactical outsourcing makes sense and a company should look for long term tactical partners are if the company:

• Is having trouble hiring or retaining IT personnel
• Wants to reduce costs related to application maintenance
• Has a continuous stream of applications to develop
• Wants to implement SAP or another similar core IT platform…

Tactical relationships can (and often should) be long standing, but individual contracts and activities are usually of shorter duration. Companies often sign master services agreements (MSA) with trusted vendors; these outline the framework agreement between the two entities, and individual projects thus have a shorter contract negotiation cycle. An MSA does not commit any money to the vendor (who still has to win individual projects) but establishes a trust relationship that the vendor can then invest into, knowing that the likelihood of future contracts is now higher. It is a partnership of friendly co-operation.

Cultivating a tactical partner in the long term has many advantages. A good partner will mirror your business goals, provide a degree of support in bad times and remove much of the friction involved in starting and stopping individual projects. Most importantly, IT is still a function heavily dependent on skilled people, and long term partnerships with a vendor allows effective people relationships to develop and improve delivery noticeably. A single preferred tactical partner - or at best two – is much better than going fishing every time there is a project to be done.

Seems great - so what's left in the strategic direction? Why not just extend the three year contract to a five year one, feel the warm-fuzzy that calling something strategic can give you, and be done with it? I like to draw examples from chess.

Strategic Outsourcing

Strategy is more about winning in arenas unseen. A tactician in chess will plan at least three and at most five moves ahead (its very hard consistently see beyond that - indeed, a combination of six-seven moves in top level chess would make the headlines). In the average chess game of 40-50 turns, that is just a small portion of the game. On the other hand, a grandmaster in chess always seems to have a stronger position than you, more options to attack and fewer weaknesses. No more able than you to see what his opponent will do five or forty moves ahead, the grandmaster is nevertheless able to visualize the position that will best face up to whatever the chess board throws up. This strategic ability, the depth of it – that's pretty much the difference between your local chess champ and Viswanathan Anand.

Strategic outsourcing is similar to chess strategy. We need to solve today's problems, but the main aim of strategic outsourcing is to improve a company's competitive position a decade hence. The partnership is usually solidified by contract - with payments, milestones, schedules and exit clauses that bind the partners to each other. A strategic partnership allows the IT partner to make investments in the relationship that pay out over 5-10 years and thus allows some transfer of financial risk as relates to IT spends.

This also carries with it the caveat – not every company needs it. Of course every company needs a strategy, unfortunately not every such strategy involves transforming IT delivery. In such cases, "strategic" IT will be a distraction or even damaging in the long run.

Some common strategic situations are where a company:

• Wants to move out of managing IT, contracting instead to purchase the business outcomes. For instance, a company can move from managing a warehouse management system to managing the warehouse itself.
• Wants to move to a risk-reward model of IT management, where IT risks are shared with an outsource vendor, as are the rewards of any improvements
• Is planning a large move from the build-or-buy model to the pay-per-use model, especially in the infrastructure and applications spaces….

Lets get back to the original question - why are you looking for an outsourcing partner? Are you looking for assistance in executing a series of tactical manoeuvres now and for the next few years, or does your company have a five-ten year strategy in mind that requires recasting IT delivery significantly? Answering this question correctly can save a company plenty of disappointments and dead ends.