Outsourcing - All there is to know

IT Outsourcing and Software As a Service (SaaS)

In my Context of outsourcing post, I have mentioned IT hype cycle. SaaS is the new hype in its early stages. Outsourcing is the option for IT shop or the business to focus on core activity and use external agency to do non-core activities of IT cheaper, better and faster. However, SaaS looks like long-standing dream of CIOs and the business. In other words, SaaS really works out then following are some the key promises:

• Accelerated Deployment
• Reduced upfront cost
• Mitigated Risks
• Increased Productivity
• Greater Accountability
• Stronger Vendor Relationships

A lot of the above are also key reasons for CIOs to go for Outsourcing IT.

If SaaS really takes off big time and delivers the promises, then why do CIOs need to outsource IT?

However, the ground reality of IT is not so simple. IT globally is such a mess that there is no one size fits all solution. There is no single and simple service. There is no simple or unique tool. It is time of peaceful co-existence of all technologies, all types of IT services and all types of approaches to a very complex problem. The book on the left is one good way to set the context. If we start all the IT shop ground as completely new set up, then SaaS could be good. For a moment, let us assume SaaS the best way to buy and deploy software. However, it may not apply to all applications. What if the applications, which are best candidates for SaaS, are already outsourced? Will the CIO or business ever bring the application in-source and then give to SaaS vendors. The answer most likely is a ‘No’.

Does that mean SaaS will not be a success?

Once again the answer is a possible no.

One solution is that SaaS will need to go for a market which is not covered by outsourcing. One scenario is that SaaS (vendors) goes after those buyers (CIOs) who have not outsourced (much) or the application which are not outsourced yet?

You may argue that SaaS vendor can promise RoI to justify the cost and risk of outsourced application to be decommissioned.

Why not? There could be takers who may fall for it. The question once again is who will decommission not SaaS vendor I suppose.

I said in my Context of Outsourcing post that outsourcing is open and big topic. I would like to highlight the key rules as I see them. Once again, there is no one size fits all solution. Every IT Organization who wants to jump into the outsourcing band wagon will have different view based on the context such as

·        Industry,

·        Technology footprint,

·        scope,

·        size,

·        current level of efficiency,

·        productivity,

·        service levels

Unfortunately, you can not outsource the task/decision, of what, how, when, why to outsource. The reason for that is every business is run by the people who have (form) their idea of how best to run it. IT Organization within the business has a lot more views of the people. Each IT organization have portfolio of applications developed over a period of time in different ways and different circumstances. In today’s industry, business gets sold and merged, CIO’s keep changing, which makes each IT portfolio/footprint almost unique like a signature. As guidance, there is a lot available in IT market place such as general trend, analysis, reports, third party advice. When it comes to outsourcing, CIO/IT Organization has to take his/her own decision/roadmap as it is quite involved and almost like a personal choice

I have listed my own choice of TOP 5 rules below:

1 Cost Should Never Be The Only Factor:

IT outsourcing only to save cost is not likely to succeed as there is lot of management efforts and money to put in up-front to design a model to work for each IT shop. It is not worth the management effort if the idea of behind outsourcing is ‘your mess for less’. To me IT outsourcing it like re-organization, there is a lot of consideration. The biggest one which most often is not considered is ‘people’ factor. Unfortunately automation level in most IT organization is quite low; hence the service delivery of IT organization is fully dependent on the people. There are other factors such as process, tools, technology, measurement, management to name a few. When IT brings a new entity (read people) to participate in end-to-end service delivery, it has a lot of depend on working together. ‘One Team’ approach is already key-trend/buzz word in IT outsourcing. However, it much more than just a buzz-word, it needs adoption depending what, why, how one is outsourcing. The level of team integration will vary quite lot depending on just you are outsourcing. For example, SAP application maintenance may be simpler exercise compared to be-spoke legacy application with a number of web-based front-end systems. Even in SAP situation, level of customization, availability of system, number of users, number of interfaces will always be different for each outsourcing context. That is where, inter-dependency, risks, end-to-end productivity, OLA play more vital role than the cost in making outsourcing a success.

2. Do Your Home Work

IT Outsourcing is not one-off decision. Even in the days of doubt-sourcing and today, it is a strategic decision and hence it is long-term in nature. So there is no rushing to it. It is not simply choosing a vendor or service provider which is what most early adopters of outsourcing thought it was. They all have now learnt a hard way that it does not work that way. The trouble is those who failed if they do not continue with outsourcing (i.e. if they in-source) they may be making bigger mistake. Outsourcing failure is never the service provider’s failure it is always the buyer’s failure. The service provider may contribute to the failure. The key responsibility to make it (Outsourcing) work always lies with the buyer (IT organization). You can never transfer the responsibility to make it work completely to the service provider. The ability to team up with the vendor is the key to the success. For all such failed cases, if you look back, the buyer of IT outsourcing has not done enough home work before embarking upon outsourcing. Once again the home work will mean different things to different people (IT Org.) such as due-diligence, involving HR, managing risk, choosing the right candidate project first, evaluating vendor’s ability so and so forth.

3. Define the Big-picture/Use Defined Process

As I mentioned in my Context of Outsourcing, over a period of time ( few decades) each IT organization has been always trying to deliver new functionality some how or the other. There always has been shortage of people in terms right quantity or right quality.  Once any new application and new change goes live, there is no looking back. No one completely re-writes an existing and running application. The level of document is dependent on overall IT management, processes followed but more than the desperateness of the team to go-live where the documentation is always secondary if you are missing the deadlines.

The trouble with software development there is no right estimation. Hence all sorts of problem crops either before the application hits the ground or after that.  I remember and I liked the statement from Roger Pressman in his book of Software Engineering, “The best way to do the estimate of a software development project is to do it”. It takes what it takes is the answer. That is one of the key reasons, IT industry has not bothered to develop any set of standardized estimation methodologies/ techniques. The whole process is so people-centric/dependent.

With these conditions, one of  the first things to do  is to define the existing processes which will help the buyer in  communications and teaming up with the service provider. In fact, the whole communication with the service provider will become much more effective and specific if you can point to specific aspect of running the IT shop. For example, a simple thing like the testing is conducted so many different ways in each IT organization For example, few IT organizations may have testing as a separate unit/service within IT. Some will have different testing process based on the delivery platform such as main-frame in one-end of the simplicity and  an intricate Web applications with a number of technologies used as high as 20 at other-end.The service provider being an outsider (even if an incumbent vendor) can not relate to the complexity of internal working unless it is properly defined and explained. It is obvious that if the service provider does not understand/relate to the big picture, it will not be able to deliver the results even if they try the best. Please note that in most cases, the service provider has a lot of tools, methodology, domain knowledge but what is usually missing the relevance to the buyer’s context.

4. Relationship is the Key

Over a period of time, outsourcing has come a long-way. There is number of measures which are in place such as SLA. However, a lot of occasions, there is no existing service level defined   between business and IT. When the buyer is teaming up / partnering with the service provider to deliver the desired level of service to the business, it sounds as if   the buyer is telling the service provider ‘Never mind, we (IT org) never had any SLA with business but I want you to adhere to a strict SLA’.

I am not suggesting that 

5. Identify the Risks Early

As I said earlier, IT outsourcing engagement is like a re-organization and hence it is a major change for both business and IT. With any change, there are risks associated. To me, most of the risks are buyers risk there is only few risks which are service provider’s risk. If the outsourcing deal fails service provider at worst does not get paid or is thrown out. It  is the buyer’s business which is hit  by the failure depending on the impact which can varying from loss of couple ( or hundreds) of millions dollars, to one missed opportunity for the business or it can also be an irreparable damage to the reputation  in the market  such as National Health Service of UK (NHS) failure in IT programme  NPfIT.

In a lot of outsourcing RFP, I have seen the buyer expects the service provider to identify the risks. This can only serve the purpose of assessing the capability of the service provider.  If the buyer does not want the failure as an option, the risks should be identified upfront .The earlier it is done it better for the success of the outsourcing deal. Once identified, the risk mitigation plan can always be jointly managed by the buyer and service provider. Once again the other factors such as relationship come into play in mitigating the risk. Transferring the complete ownership of risk mitigation to the service provider is not likely to be very effective.

 Outsourcing is a big and open topic. Being an IT person, my blabbering will be on IT outsourcing and not on a wider outsourcing topic such as BPO.  To make it slightly more focused for now, I will try to narrow it down to IT outsourcing and emergence of Indian/Offshore IT vendors. This blog is primarily

·        To build the context for keeping the discussion on

·        To stay focused.

The dictionary meaning of “outsource” is:

 • Verb 1 obtain by contract from an outside supplier. 2 contract (work) out.

Above is a simple meaning of outsourcing but not very useful for the readers.  But I believe that it is always useful to relate to basics.

Why Outsource? 

IT industry has always been growing ever since it came into existence. There always been a shortage of quality and quantity of IT resource some area or other if not all areas. From time to time, the skill areas keep changing from IBM CICS/DB2, Unisys Linc, C++, SAP or I2 Technology or SOA expert. The main reason for the shortage is the emergence of new technology while there is already backlog in older technology. There is always been a hype about the new technology which initially seems to fix all problems for the IT organization. This has been the trend in this industry. The flavour of the month (read 4-5 years) changes e.g. UNIX Vs Mainframe in 80’s, Object Oriented and 4GL, Open Systems/3 Tier , n Tier in 90’s or SOA, Web Service of today.

Proliferation of IT in business, home and arrival of Internet /

I remember an article I read in early 90’s. In US, outsourcing was called ‘doubt-sourcing’ due to the fact that most often outsourcing deals used to fail than work. I remember another article around the same time which mentioned that the Fortune 500 organizations used to make (bloat) the deal size to 1 billion dollars so that they can attract the big 6 of IT. 

If you look at it from the running the business perspective, IT matters but it is not the mainstream (core) activity for the business and it is not worth the headache, IT may at times create for the business. Today, a large percentage of IT dollars is spent only to keep the lights on. Is it worth the efforts?  Why not pass on to the pain to someone else?

So, there is one mantra i.e. outsource.

For the business, the big advantage in outsourcing IT, the business, at least, has the levers to pull, such as service level agreement, renegotiation of the contract, industry best-practice, outcome based contract.

.

Business IT Alignment  

Business IT alignment was a problem in 80’s /90’ and remained a problem even after that. Probably it will always be problem for next decade if not beyond. This is another driver for outsourcing. Internal IT organization does not always deliver the outcome the business expects when it needs it. Hence natural way to fix the problem for the business is to outsource IT.

Learning Curve: To Err is human, to foul things up you need  a computer..

From the days of doubt-sourcing, outsourcing has come a long way. It has now been become a part of IT strategy if not mainstream business strategy.  In most cases, IT outsourcing started working during last decades. It has gone through the maturity life cycles. There are leaders and followers in each industry to use IT outsourcing as key business enabler or part of the IT strategy. There is no one size fits all solution.   The customer (buyer) is getting smarter. 

Rules of outsourcing are always changing. Number of mega-deals is reducing now. There is a growing number of accounts with multiple vendors as strategic partners unlike earlier days of large beach head accounts serviced by one of the Big6.  

Just to highlight a trend, I copy below this old news clipping which may not be valid any more (though)

The outsourcing market received a massive boost with news that the number of outsourcing deals worth in excess of $1bn (£546m) doubled in 2003.. deals worth in excess of $1bn more than doubled to 29….…IBM Global Services was the biggest winner, taking 21 percent of all contracts, while Computer Sciences Co. and Hewlett-Packard were reported to be making “significant gains” compared to their 2003 numbers. (Munir Kotadia ZDNet