- February 26, 2009
- Posted by: admin
- Categories: Blog, Enterprise Agility, Outsourcing & Agility
Please identify three basic reasons why you would NOT outsource your IT needs to any company, offshore or otherwise. Please keep in mind the current US crisis, and if possible, give your thoughts on how you feel the US IT sector can contribute to the economy, keeping your reservations in perspective.
I’d sum much of it up as cases where sufficient specificity and comfort in its completeness cannot be achieved. Lower cost is not clear when the value prospect is not defined. Specificity and comfort in its achievement are crucial. Risk perceptions are related to specificity too and when the Risk is perceived as large in proportion to savings, the savings are not as relevant to the choice.
I’d say the largest is when the client company is “Feeling our way” and not entirely clear on the specific outcome. For this, everyone needs to be in the same company, same team and same facility. Arguably this is not a good business situation but it is not unusual, especially on smaller projects.
There is a valid concern about added costs for dealing across organizational, corporate or national boundaries. The less well specified the project, the more this concern is valid on that premise.
The work may involve trade secrets, embarassments or other issues that the client company simply doesn’t want out of its doors, no matter the legal assurances. Again, what is not to be disclosed may be difficult to track and assure that contracts are complied with.
The clients customer may have requirements for background checks and/or citizenship that are not possible to meet with an outsource firm. Arguably these issues may not be completely authentic in every case but a way of satisfying some poltical agenda. The agenda may be internal as a manager may wish to maintain his head count and therefore his status. A volatile headcount whether through employee change or multiple outsourcers, increases the number of “fingerprints” which could contribute to identity theft and similar crimes.
There are now government inducements and pressures, and popular ones too, to keep work inshore. I’m sure you are aware of this but they are quite real and will remain so for awhile. I think behind this is a sense that companies have been sloppy in taking care of their customers, especially their privacy and identity. It is arguable how outsourcing might contribute to this but perception is everything. Client companies are in a very tough situation winning customers and eager to please.
The basic permise is that you should work to deliver the greatest benefit to your business by maximising shareholder value. That remains true. As soon as nationalistic pride (aka protectionism) gets in the way you end up paying a premium for goods and services. This in turn decreases your own company’s profitability. If cost minimisation is important and offshoring delivers the best cost savings then why would you not go ahead with it? You could claim that you’re preserving jobs in your economy…a laudable concept but is it worth risking the security of your own employees? That’s why ship building is done in Asia and low cost clothing is made in the far East. It’s simply cheaper. That increases your own firms profitability and so it’s own financial viability and survivability.
Zohaib, the answers above make sense to me. I’d like to provide a bit more of a framework as to the oustource/don’t outsource decision as it relates to applications. People tasked with deciding if and/or what part of applications maintenance & development to outsource have to answer the following questions:
1. Is the organization ready for outsourcing? One sub-points to consider here are if the organization is ready to invest some resources up-front (say 6-18 months) in order to lower on-going costs later. Another one to consider is how closely tied IT and the business are. (This gets to the first answer above). If there is no good delineation as to where IT stops and where the business begins then it will be very difficult to work without tremendous amounts of on-site coordination
2. Are the applications in question suitable to be developed and/or maintained by a 3rd party? There are several points to consider here:
a. How critical is the support of the applications in question? How quickly do they have to be able to be brought back on line? This will tend to keep some revenue producing apps managed close to the business.
b. How stable is the application? If it has frequent, unscheduled applications or a major project is underway – requiring a lot of business input- then this would tend to keep that application close to the business
There are no doubt other factors to consider, but these should get you started. If the group that is tasked with determining whether and/or what to outsource determines that the organization is not ready and that the applications are not ready then the question should be asked “Why not.” As the first poster pointed out a flat out “not ready” to both of these questions suggests that there are larger issues (e.g., IT not well run, IT not well-respected, weak SDLC). What I often see is a more “nuanced” answer or outcome. For instance:
Some part of our IT portfolio (x, y, z) can be made ready to send offshore if the organization commits to do a, b, c. In the near-term we don’t see that other portions of the IT portfolio (a, b, c) can go offshore because the changes required to the company/applicatons are too daunting etc and unlikely to be cost-effective.
Let me know if this makes sense. Glad to discuss.
1) If the application is home grown – Some companies during the course of time, opted to build their own version of what is now standard, off-the-shelf applications and will not invest in the cost of migrating to a package that will have a global talent pool. The code may be legacy, built on older technologies that are not mainstream with today’s tools which makes support difficult and not cost effective for the out-source provider.
2) A company may use a “best of breed” approach that uses multiple point solutions – This could include pieces that are multiple internal systems as well as SaaS and ASP vendors as a part of the “application puzzle”.
3) Customized applications implemented using standard tools but require fast response speed – Example: A database that is used to create a core data product may have slow screen response for users that are performing key entry “X-miles” away. The customized system may prevent a successful outsourcing project as it was designed with certain constraints that have been tuned for a local environment. Companies may not invest in the rewrite of the application which provides critical data for performing calculations within their product.
Moving forward, companies will need to assess their computing needs and create plans that will move them forward in utilizing resources that provide the best use of limited dollars. The age of SMARTSOURING has arrived. This could range from creating strategic partnerships with one or two companies where you can share computing resources – each leveraging their strength to satisfy a shortcoming in another company – to moving common services (i.e. email, SharePoint, etc.) to a service provider.
1. Fear — potentially loss of intellectual property, trade secrets, customer data, financial information, etc.
2. Barriers to Accountability – Distance, language barriers, etc. (sometimes a manager will want a vendor so close he can “get his hands around the guy’s throat” in the event of unresolved problems persisting.
3. Xenophobia – Americans have been conditioned to hate the outsourcing of “our jobs” to other countries, even as we enjoy the fruits of low-cost production in countries like Mexico or China or the lowered cost of IT work when it’s been outsourced to India. For a more human and humane view of India (and hence [for Americans at least] the region, including Pakistan, Bangladesh, etc.) we can thank “Slumdog Millionaire.” I know that having seen even a fictional Indian call center I can never think about the Indian on the other end of the line the same way again. Suddenly that individual has no less right to make a living and a life as any American. The mental image of acres of sterile cubicles without any trace of personal effects has given way to something more like the Triangle Shirtwaist factory…
1. I prefer to have direct face to face contact with vendors.
2. Our business is hard to explain and fairly unique. Our own people and our own users are best equipped to design systems that work for us.
3. It costs more.
Please take a look at a look at my post Top 10 Reasons NOT to Outsource which is an extended answer to your question. Regards, Nick
The primary reason NOT to outsource at this stage is risk.
Where some of your IT has been outsourced then extending the agreement should not represent a risk as the corporation understands the process and can extend the agreement to make added savings.
Many companies will be looking to outsource at this time attracted by a good cost proposition. However there are some risks associated with outsourcing. Getting the legal agreement right is crucial, is is controlling the cost structure during the entire duration.
If you are looking to keep budgets locked down, then outsourcing and off-shoring look very attractive options. It is essential that all such agreements are managed properly. I have seen some past outsourcing agreements go horribly wrong, not only did the company give away all maintenance and intellectual property rights to the (internally developed) software, but they did not control the costs, so the company was effectively held to ransom by their IT supplier. They did not involve a lawyer in negotiating the agreement.
When you outsource the basic premise is – you know what you are doing, so you are in a position to tell the outsourcing company – what they are supposed to do for you.
1. If you are a small IT shop – with less than 20-30 resources, that amount of bandwidth (i.e time, processes etc) needed to give the information / requirement to the outsourcing company becomes a hindrance to
2. You dont understand how Outsourcing works, and you confuse yourself between “developers” in outsourced geographies to “engineers” in US. The mind-sets, approaches and scale at which an Outsourced process is justified needs “experience”.
3. Outsourcophobia : “I’m the original Maverick, and no one else can do it better”. I liked the word – Xenophobia referred earlier too.
I am assuming over here that the organization has already decided to outsource the work and the question is whether to outsource with in the US or outside the US… if that is the case, here are the 3 reasons
1. The Govt aid has been provided to fight the glooming economy.
2. The applications are highly localized and requires vendor to interact end users or organizations clients.
3. What parameters drives the vendor selection (cost, capabilities, exposure, experience, worldwide presence… etc)
1. We need to keep jobs in the States for Americans
2. There is a disconnect/language barrier/lack of relationship offshore
3. You get what you pay for. It’s cheap for a reason.
I read all the above posts and it seems to very interesting to know that people do have very diverse opinions and reasons on “WHY” to Outsource and “WHY NOT” to Outsource.
We could keep on bragging about this till the cows come home!
But the underlying fact of the matter still remains that Outsourcing or Offshoring( I personally would not prefer to use this word.. I would like to refer it RightShoring or ValueSourcing) still remains a business preference among Corporations.
Corporations across the world(Microsoft, GE, Oracle, JP Morgan, Bank of America, Dell etc) have benefited through it by exploring Cost/Skill arbitrage, Locational Advantages and staying ahead of competition.
If someone can cite 5 reasons why he/she would NOT outsource – someone else could cite 10-15 reasons on why he/She would still Outsource so the underlying benefits of RightShoring or Valusourcing far outweigh the reservations of NOT Outsourcing/Offshoring.
Finally- The World is becoming FLAT, the cost dynamics and parity equations are getting blurred. Nothing exists like “My Country” or “Your Country” to brag about. We are all Global Citizens belonging to a Global Village. Whose shop would sell the best quality and the cheapest of sweets – customers would finally buy from them.
Visit my blog for an article on Deploy Offshoring-Outsourcing Success: Define Metrics
1. Not only keeps folks in the US employed but also easy access to local
2. The cost of traveling and training not to mention if offshore team member(s) decides to quit. The re-doing process is too costly
3. Overall managing is easy
1.The maturity of the business process and technology may not make it ready for offshoring.
2.Too strategic to the company and inline with the core competency
3.Comfort that a trained and skill knowledgebase exists overseas, tailored to specific needs.
If you do not outsource and save cost now, the local prices will rise further and people will anyways resort to buying IT services from Indian/Chinese providers rather than US companies to save cost and will hampering the American growth anyways and cause more job losses.The global giants like IBM and Microsoft certainly get it.
We need to take a longer term view on this rather than live for today and now and make sure our generations don’t end up paying. Now I agree that this is more a social issue than an economic one in the current crisis but reality will hit hard a few years from now if we do not develop a mature outlook.
When I can use a site like http://www.ExpertMagnet.com to source quality experts within the US, there is no need to go o/seas.
As one respondent had mentioned we could go on and on till the cows come home !!!!
My two cents worth.. Why you should outsource
1. Make Value sense if properly setup. Which means if the client is able to define things clearly, scope is properly agreed upon and the process of accountability clearly established.. Believe me that is a very tall order to achieve that ! But the value comes by with a proper structured delivery.
2. Outsourcing helps new job definition. One of the big plus points and earning as well is from the field of standards. The americans have had a heads up in defining many standards, institutes and best practices and they have been fairly successful in enforcing them abroad through subscriptions and sale of services. Outsourcing can spring up such new unthought of avenues for employment and value generation
3. Cost arbitrage. Every business needs to cash to survive. when little funds are following expensive resources, outsourcing is definitely a way to go. Plus with a falling dollar, you get more bang for the buck abroad!
10 cents worth why you should not outsource
1. Uncertainity about business future. Outsourcing requires a long term focus so that the partner can deliver beyond the immediate honeymoon periods. So if the business is expecting severe business turbulence, stay away from it.
2. Lack of competent staff.. When the client cannot clearly spell the deliverables in crystal clear terms, its better to stay away from such engagements. Also, clientside employee volatility is also important as the person involved in outsourcing leaves then the doldrums set in.
3. Unless the business can generate enough cash flows to work with partners ( on-site/outsourced) stay away from such tie ups.
The glass is either half full or half empty. So protectionist methods do help the local govt think tank appear more helpful to business but in reality it is the business that suffers. I am not advocating outsourcing in any way but it remains a fact that whether you manufacture cars/drugs/equipment, outsourcing local/international is here to stay. And in a certain sense its good for the outsourced countries as well. If the bright kids are compelled to move from listening to disgruntled customers for a livelihood for things that they had nothing to do with, it might force them to come up with bright business and innovative ideas.
So the water is there and shifting it from one glass does not make the water disappear.. Only the core essence just got shifted.
I can only speak from my own experience, both as a purchaser of outsourcing services and as a provider of outsourcing services.
There are plusses and minuses to every outsourced IT arrangement. Since the question was focused on the minuses, I’ll present my reservations about outsourcing, and leave the obvious cost-reduction issue on the table.
1) Potential Process Inefficiency. You are moving what are possibly business-critical processes outside your control. You are subject to your outsourcing provider’s processes and governance model, which might or might not be sufficient to your needs. In my experience, this has been a killer on several large projects, where the outsource vendor could not deliver as promised, and we did do some fairly extensive research before vendor selection. The deliverable was of generally poor quality, the vendor was often unresponsive and a lot of money was lost and deadlines were missed. The last several years, there was a growing tendency to want to outsource infrastructure, rather than just development/coding, but it seems to me that the lack of hands-on control of infrastructure made that problematic for many who tried.
2) Logistics Issues. By logistics, I am referring to issues like time differences (requiring frequent conference calls far outside of business hours), language problems, cultural differences, etc. These issues can often seriously impact successful project completion, even if there is a company representative on the vendor’s site. Also, the translation of business requirement to technology solution can be much more easily lost when the outsourcing vendor doesn’t feel any accountability to the business end-user customer. Realistically, once you have committed to an outsourcing vendor for a project, it is from a practical sense almost impossible to change vendors in midstream, even if they are not delivering quality work.
3) Customer Perception. This is primarily an issue for those who outsource Contact Center processes. Simply put, there are a lot of customers who quickly become irate when they have to have a service call with a representative who has trouble with English, who, due to cultural differences, may be perceived as rude, who has a heavy accent that is difficult to understand, or simply doesn’t have sufficient product knowledge to be helpful (probably the most irritating of all).
Recently, I’ve read a couple of interesting articles on IT outsourcing. It seems to me that on both sides, the trend is moving away from the “partners in innovation” model and toward a model of outsourcing only those items that can be done within rigid processes and with rigid instructions.
I do believe the argument that cheaper is always better doesn’t necessarily always apply here. You have to be very careful when selecting a vendor. See what they’ve SUCCESSFULLY delivered to similar clients. Ask a lot of questions about their processes, about QA, about communications channels. Be selective about which projects and processes can be outsourced. It might be that the cost savings on an upgrade of an existing piece of software, requiring a lot of make-work coding and little engineering, would be ideal for outsourcing, whereas new development for a mission-critical new application might not, for control and quality reasons. Outsourcing is not the universal panacea everyone thought it was going to be. It can, however, be used selectively to reduce costs when adequate controls can be placed.
I realize this has absolutely nothing to do with the current state of the economy. This is just business sense and experience.
Cutting costs is nice in every economy. Doing good work is critical in every economy. I would maintain that it might be better to examine internal processes for inefficiencies and cost savings before rushing to just outsource everything and fire all the internal employees to grab the obvious cost savings.
Simply put, you get what you pay for. The market in some third world countries may be sprouting, but without the in depth background to sustain it, the guarantee of having five nines of reliability isn’t there. It’s as if we asked a bunch of final year and new grads to run the department, the book smarts “may” be there, but the knowledge to be proactive enough to avoid problems simply doesn’t exist.
At the end of the day, by the time it does, I doubt very much that the pricing would be sufficiently lower to get value in taking jobs out of the local economy.
1. Process inefficiency — if something goes wrong and you have to troubleshoot the problem and/or deal with process issues personally, the travel and delays are a hindrance.
2. Time to market and inventory — if selling software, your time to market is longer than if you are producing where you are selling so more funds are tied up in inventories.
3. Economics — If you make where you sell, you do not have to be concerned about currency conversion or devaluation. You can also choose where to export based on the strength or weakness of the dollar and how much share you wish to have in other markets, if any.