How Enterprises can gain from Outsourcing and Offshoring?

In my years of experience working with various organizations on their IT outsourcing strategy, I have seen organizations starting with intent to focus on the core and outsource the non-core parts of the business. As a strategy this is great but I have often found organizations losing site of it during the course of the implementation.

Some of the expectations, which in my view are misplaced expectations, are:
Benchmarks used for working with staff augment companies would work for outsourcing vendors too
outsourcing would yield immediate cost savings
that having multiple vendors for outsourcing would help reduce costs and the vendors competitive
that the value addition of an outsourcing vendor is that of only flexible resource / staff augmentation. Resources can be added / released at will / as needed
when there is pressure on cost savings, the place to look for savings is with the outsourcing vendor

I am sure there are a few more but the above should be a good set to try and address which should enable organizations help review / assess their (IT) outsourcing strategy in general.

a. Benchmarks

Outsourcing has come a long way. There are the strategic outsourcing / offshoring companies providing application development, maintenance, application support, and infrastructure support services, and then there are the companies which are purely into offering temporary staff augmentation.

Very often, I have seen companies who have been working with staff companies, struggling to make the switch to work with an outsourcing vendor. If your company falls into this category, you need to closely look at your evaluation criteria. You need to ensure that your IT Vendor Management team is qualified to evaluate an outsourcing vendor. Very often the IT Vendor Management tends to use the same yard sticks they were using with the staff augment firms, and if it is not fixed, it will starting hurting the organization - vendor relationship very soon.

b. Immediate Cost savings

This is closely linked to the way you view the vendor relationship and it is therefore very important that you make sure you are clear on what you want to accomplish and then set expectations accordingly. One has to draw a 1-2 year plan defining the outsourcing engagement. The plan should identify the projects to be outsourced, vendor engagement model, cultural integration, cross team training, communication plans between the two organizations, if there are multiple vendors involved then it should define the governance model across the different vendors, if the outsourcing involves offshoring or near shoring then it would require some goal setting on the percentage of work to be outsourced, etc. Typically, the 1st six months is really a period of investment, period of learning and adjustment for both the parties, establishing processes and procedures, understanding the privacy, confidentiality, security, on-boarding and off-boarding processes, stabilizing the governance model, defining the Service Level Agreements, etc. You have to be ready to make that kind of an investment in the vendor, if you have a long term strategic view on the outsourcing / offshoring model. This initial investment of time and resources from both parties, will help in building a true partnership model.

During this period the vendor may have started executing projects, may make mistakes, may run into cost overruns, may miss schedules, may violate the processes and procedures; you have to be patient, forgiving, cutting some slack, motivating, covering them for the cost overruns where there is reasonable justification, and really play the role of a nurturer. This is a critical initial phase and I would say a very important phase. Very often, the clients get into evaluation, critiquing, express frustration, demonstrate impatience, are punishing for cost overruns and unforgiving; and invariably this could be a trigger for the relationship to turn south. If you pass this phase, it conjures up a good sense of bonding between the two organizations. Again, as simple or non-trivial as this may sound, this is a very tender phase.

c. Multiple Vendor

I have seen different cases. I have seen corporations who were working with one vendor wanting to bring in other vendors, corporations who were working with multiple vendors, wanting to consolidate all their outsourcing to two vendors, and lastly corporations working with two or more vendors wanting to consolidate to one vendor. All the options may make sense based on the situation the client is in, sometimes it is the complexity of managing multiple vendors which leads to consolidation and sometimes it is the fear of over dependence on one vendor, which prompts them to look at a second and a third vendor. As a client you want to work with one or two vendors, given them the preferred vendor status and really involve them as a true partner, and engage them in your strategic decision making. This also gives the vendor(s) a better understanding of your business, enable the vendor to be more deeply involved and also try to get involved on risk/reward engagement models.

d. Staff Augmentation - Tactical Resourcing

In an outsourcing engagement working with other vendors, if you goal is only tactical one off kind of staffing then I would not suggest you engage with a outsourcing / offshoring vendor. Typically the high end outsourcing / offshoring vendors provide the outsourcing / offshoring across the entire business value chain and also bring to the table fairly good domain and consulting expertise. These organizations would be an overhead if all you would like to do is hire a few resources to meet some temporary demand.

e. Cost Savings / Down sizing

I have seen clients when there are pressures to reduce costs, trying to reduce their outsourcing / offshoring business. I would caution you that one of your goals to engage outsourcing/offshoring was to reduce costs, by trying to reduce your offshoring / outsourcing costs, chances are you are looking at the wrong place for savings. While it is critical you are constantly measuring your ROI on the outsourcing / offshoring initiative, you may want to ensure you are always maintaining a minimum core team to ensure you are not losing the knowledge base and not landing up having to retrain people.

Conclusion

Like anything else, you will derive great value, with outsourcing and offshoring only when you plan it well and worked out the details. Like anything else, there will be bumps along the way, but things work out well if the relationship is built on trust and is cordial, a relationship which is both give and take, a relationship which is strictly focused on cost, terms and conditions of the contract invariably tends to be a stressful relationship, something neither party will enjoy. You have to recognize that an outsourcing engagement is long term, trusted partner relationship.

Additional References:
Exploding the myths of offshoring