Outsourcing safely

By Scott Wilson, January 9, 2009 11:18 am

Implicit in the conflation of agile operations with fragile support is a requirement that your users have access to services which are at once flexible and scalable and which are also efficient for your business to provide. When you put those three words together, the next thing you come to is inevitably outsourcing… using a third-party provider to allow far vaster economies of scale come to play on your problems than your company could generate itself.

There have been a lot of businesses which have found that outsourcing is no magic bullet… certain providers use the opacity of distance and bureaucracy to pad their margins by hiring sub-standard talent, or cutting corners on the services they provide. A failure to significantly assess the impact of outsourced tasks on your operations and to systematically structure the tasks that you outsource to be "plug and play" can put you in a position of vulnerability rather than control, and lead to unhappy outcomes.

If you can focus on the right factors internally, and design your outsourcing strategy to rest on the strengths of the concept, then right now, in the middle of a recession, is the perfect time to increase your outsourced workload. The scalability is exactly what you need when the economy is uncertain; the flexibility is for your peace of mind when outsourcing firms may be affected as heavily or worse than yours.

More after the jump.
Of all technical services outsourcing, off-shore outsourcing garners the most attention and can provide the most attractive margins. No country is more closely associated with technical off-shoring than India. After a series of difficult events this past year, culminating in this week's admission by CEO Ramalinga Raju of Satyam, the fourth largest outsourcing company in the country, that he had overstated profits by almost a billion dollars in the past several years (this itself in the wake of revelations that Satyam employees had likely engaged in bribery of client staff at World Bank) , the wisdom of off-shoring to India particularly has been called into question. With the rapid expansion of the industry in the past decade driving down some of the cost advantages and new competition emerging from other hungry nations such as China and the Philliipines, the Satyam scandal is the last thing the industry needed. Managing director of Delhi firm Taurus Asset Management R.K. Gupta is quoted in the New York times as saying "The fraud has 'put a question mark on the entire corporate governance system in India.'" Speculation has already begun over the potential for "customer mass exodus" and whether the company will be sold or simply fail outright.

None of these are things you want to hear about your outsourcing partner, and the fact that there were relatively few warning signs visible until quite recently is sure to make CIOs nervous about off-shoring in general.

These issues, however, are nothing new or exclusive to India, or to outsourcing. The fact remains that India-based offshoring remains financially attractive, and despite competition, the country has perhaps the deepest well of educated, English-speaking technology professionals to draw on of all the contenders. Moreover, both those professionals and the companies they work for have experience now, something which will take a decade for potential competitors in China to gain.

While undoubtedly some customers will find themselves burnt severely in the Satyam debacle, the real fault lies not with Satyam, but with customers who forgot exactly what the point of outsourcing is and didn't structure their operations properly to take advantage of its strengths.

The key to putting together safe, sustainable outsourcing packages is to avoid outsourcing your core business (whatever that may be) and to take services in sufficiently generic fashion that they can be transferred between internal and external vendors with minimal disruption. One of the largest knocks against outsourcing has always been that vendor staff simply aren't familiar enough with the client's business to perform as efficiently as client staff in the same tasks. This, to me, has always missed the point; you shouldn't be outsourcing any function where that is the case, where you are requiring the outsourcer's staff to have special or identical industry knowledge to your own staff. If you do, you are no longer simply "outsourcing"… you're in a long-term business partnership, and perhaps a quite dangerous one that hasn't been adequately considered or described by either party. "Outsourcing" implies a degree of control and independence on the part of the outsourcer. If you are tied into a specific vendor, to my mind you are engaged in a partnership, not outsourcing.

Recent trends in off-shoring have lead to more and more specialized and industry-specific functionality being outsourced, including research and development. Although, due to the organic nature of this evolution, it's all thrown together under the broad canopy of "off-shore outsourcing" I believe this level of involvement extends far beyond the type of outsourcing basic functionality to achieve those watchwords of flexibility, scalability, and efficiency. Those arrangements may still be beneficial when weighed fully, but they are outside our scope here. I've discussed some of the benefits to that model previously and I don't think it's a bad model, but with the uncertainty in the markets currently I am increasingly coming to the opinion that those ventures should be separated from the basic services outsourcing that is primarily oriented at increasing operating efficiency.

In short, outsourcing, and particularly off-shore outsourcing, isn't something to shrink from even in the wake of such grim news, and in such difficult times. In fact, it's time to look harder than ever at what you can outsource in your IT department, and where you can do so as cost-effectively as possible. India, and the remaining stable services firms there, are still at the top of the list.

2 Responses to “Outsourcing safely”

  1. Acquiring specialized services through outsourcing to support one’s business core processes at company HQ allows for more flexibility and options in these uncertain times. I agree that outsourcing one’s entire business could lead to great risk, but I think why businesses engage in long term ‘partnerships’ with their outsourcers is because it can return great rewards when managed properly.

  2. Scott Wilson says:

    I agree; what I am really getting at is that those arrangements should be pursued with the due diligence warranted in approaching a true partnership, when often they slip in under the broad canopy of “Ah, we’re just outsourcing, if these guys don’t work out we’ll use someone else.” There are some tasks for which it is that easy; core processes, usually not so much.

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