Global Sourcing Blog

When an outsourcing trend is headlined in the business press it’s a safe bet that it’s already embedded in the industry mainstream. Still, it was interesting to note in a July 17th article in The Economic Times -- Big IT to gain as global cos tap best-of-breed vendors – that “outsourcing customers plan to work with fewer vendors at lower rates.” 

As an employee of a “best of breed vendor”, this would be welcome news indeed, if it was actually news. However, companies have been cutting back on the number of service providers several months; and in some cases for years.  So, why is the shift away from multi-sourcing suddenly garnering press coverage and what’s driving it? Meanwhile, does this trend represent a return to the “your mess for less” era?

For starters it’s mostly about costs, but not necessarily about a mass quest for lower rates, which is really being driven by the global recession. The real issue is the complexity and cost of managing multiple service providers or, more precisely, the fact that many companies lack the ability to manage multiple service providers. This is a fairly long-standing problem, but one that has gotten attention in the industry press only recently.

The first public note of the trend I saw appeared computing.co.uk on April 29th. The article announced the findings of a research study by PA Consulting under the headline “Multi-sourcing hampers efficiency, study warns.” The primary reason for the lack of efficiency was called out in the body text, “PA warns that many of these businesses [the companies surveyed] lack the necessary in-house resources to manage multiple outsourcing relationships.”

This is not a problem shared by all outsourcing practitioners, however. A number of companies – including several Infosys clients – started out exploring best of breed sourcing as late as two-to-three years ago and have since settled on a few service provider partners. In short, they have been doing to sourcing what CIOs have been trying to do to years of accumulated legacy IT. That is, standardize and consolidate.

There are differences between this approach and traditional single vendor sourcing, however. Instead of looking to one service provider to take on everything from business processes to applications to infrastructure, companies on the consolidation track are looking to specialists for expertise and competitive pricing in each category. 

Some service providers may have delivery capabilities that span all of IT but none are the best at, nor are they price competitive in every facet. There’s also risk mitigation involved – the phrase all one’s eggs in one basket comes to mind.

This is not to say that companies are not seeking expertise and best of breed in sub-categories. Service provider partnerships remain a key consideration in selecting best of breed providers, as is the goal of having “one throat to choke,” that being the throat of the prime contractor.

Still, it gives one pause to realize that after 20-plus years sourcing management and governance remains a challenge for many companies.  As PA Consulting discovered in its research, only 16 per cent of the respondents said they have “a mature model for governing outsourcing agreements.” But that’s a subject for another time.

Posted by Stephen Lane at 3:49 PM | Permalink | Comments (0) | TrackBacks (0)

When the global economy started to go down the tubes discussions about innovation and outsourcing all but disappeared from the business and IT industry press and blogosphere.  Recently, though, the topic has reappeared.  Either business is improving or some companies recognize there are other ways to survive and thrive in the downturn besides slashing budgets, canceling projects, and seeking lower service rates.

Curious as to which is the case, I spoke with a few Infosys clients to get their ideas outsourcing and innovation.  The conversations, which by no means represent a statistically valid research sample, were mostly positive.  Innovation has not completely lost out to cost cutting.  If fact some clients see a positive connection.

One client was quite clear on this point, saying “Rate reduction is not differentiation.  Sure, a company will take it but then what else is there to the relationship?  In hard times you know who your partners are.  Now is a great opportunity for service providers to innovate internally to further solidify bonds.”

When asked for an example he described a brainstorming session Infosys initiated a few months ago.  The outcome was an agreement to start a BPO pilot program, a first for the client company, a long-time ITO sourcing practitioner.  On the surface, the program appears to be a simple labor cost reduction play where a few industry-specific back office activities will be performed in India by specialists in the field. 

In the view of the client stakeholders the act of outsourcing business process, particularly to India, was itself innovative.  But there’s more and just offshore delivery involved.  Infosys is investing in a system to “operationalize” the processes on a per-unit transactional basis.  The client also noted that since each transaction is relatively complex with potential for more bells and whistles,” that is additional innovation.

Process automation was a reoccurring theme in most of the conversations but not the only one.  One client describe an enterprise wide application development initiative where Infosys was called upon to not only build but design and architect an interactive portal for the client’s sales organization, business partners, and end-customers.

Described as a “mega-project” involving 30 different applications, the initiative was measured not only by the usual timeliness and quality criteria.  More important was its business impact; including market acceptance, which was three times the estimated target, and achievement of first year sales goals, which were met in five months. 

Again, innovation was not only in the results but to the process.  According to the client Infosys role was not that of a typical outsourcing partner but rather as a key participant and in some cases a leader throughout the entire life cycle.  That is, the client and Infosys collaborated to create an innovative way of sourcing application development.

This raises another point about the topic at hand, the importance of innovative service delivery; even when applied to the most basic outsourcing driver, cost management.  To this end some clients have adopted managed services models, assigning significant responsibility if not outright ownership of large portions of their application portfolios to Infosys and other service providers.
 
Instead of seeking cost reduction through labor arbitrage they have set service level targets based on reducing operations costs, typically on an annual basis.  To meet the client targets while achieving profitability the service providers must innovate; consolidating, enhancing, and transporting applications so that it takes less effort to manage them.

Now, some will argue that coming up new sourcing models and service delivery methodologies is not really innovation, at least in a business sense.  Indeed, there are those who claim that the very nature of outsourcing relationships – where deliverables and service levels are contractually defined and pricing set accordingly – runs counter to the idea of innovation.

There are also people who say that client business and IT stakeholders often can’t agree among themselves on what is innovative as well as those who wonder if outsources can even innovate.  Then there is the question if innovation can be measured in an outsourcing relationship. 

The whole discussion seems at times like the old joke about lining up a group of economists end to end only to discover that they all point in different directions.  

The fact is that for as long as I’ve been following and participating in this particular discussion I have never heard about or read a consensus definition of innovation in the context of outsourcing.  To this end I’ve come up with a simple set of criteria that, whether others agree with it or not, helps me deal with the complexities that lay beneath the surface of the more obvious aspects of outsourcing. 

It starts with the premise that if a client thinks that something is innovative then it is.  Second, no matter who originates an idea – the client or its services partner -- if the two sides can agree on its scope and measurability it can be turned into projects or a program.  Third, if the project or projects can be broken down into deliverables that can be defined and measured in terms of service levels the whole thing can be outsourced.

As the old saying goes, “the devil is in the details.”  But, at least this simple proposal takes the discussion past the point of getting hung up on the definition of innovation and whether or not it can be achieved through outsourcing.  After all, isn’t innovation really in the eyes of the beholder?

Posted by Stephen Lane at 1:30 PM | Permalink | Comments (0) | TrackBacks (0)