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How Do I Get My Hands Around This IT Outsourcing Thing?

How Do I Get My Hands Around This IT Outsourcing Thing?

There aren’t many business functions that have as many conflicting stories of successes and failures as the outsourcing of information technology.

Interest is fueled by what everyone inherently knows – different companies have different skill levels and cost bases around different operations. Whether a company is “off-shore”, “near-shore” or “on-shore” is of secondary importance.

So what’s the difference between those outsourcing projects that fail and those that succeed?

First, it’s important to consider what is a candidate for outsourcing. To answer this, you need to understand what your true strategic differentiation and core competencies are. If at your core you are a paper manufacturing company, you probably don’t want to outsource your factory operations. If you are really a marketing and sales company that focuses on paper goods, then there may be others out there who can provide you paper at a better quality and lower price. Whether you are considering outsourcing technology or marketing services, the same analysis needs to be made.

This core competency analysis is not always as cut and dried as we’d like to think. I am the CTO at a company offering a suite of different software services for the education market. Ostensibly, building software is our core competency; yet we outsource part of our development and production infrastructure and internal IT infrastructure management. Our corporate competency really lies in understanding the needs of our client base and translating that into scalable solutions that address their needs. The actual code development, server management, and data center operations are just a means for us to execute those solutions.

Much the same way as you might utilize a PR firm to tactically execute a vision for the message and identity you want in the marketplace, information technology can be outsourced to experts in tactically executing on your vision or “requirements.”

After you’ve determined the line between what is an outsource candidate and what you want to keep in house, how do you figure out what outsourcing model to utilize? There are lots of different ways to look at outsourcing, but I like to balance the task themselves against the strategic value. The diagram below provides a simple framework.

Traditional “Job Shop” – This type of outsourcing involves closely defining a specific set of tasks and handing them off to someone to build and then deliver back to you. Sometimes this involves a gate process with specific check-ins. The defining characteristic, however, is a very specific set of deliverables defined up front.

This model has an inherent conflict built in between the client and outsourcing agency — any change in scope requires financial re-negotiation or penalties. This model works best for simpler tasks (i.e., tasks that can be clearly defined and documented up front). It also is best suited for tasks with a low level of strategic differentiation. First, any knowledge base accumulated in the project disappears with the outsourcer when the project is completed. Second, the cost of failure is (normally) lower. An example project in this area might be the development of a simple corporate website.

Team Augmentation Model – Under this model, you augment your existing team with outsourced resources. The teams may be co-located or geographically disparate. The defining characteristic, however, is that you are augmenting your team with flexible capacity but still maintaining close control over the project.

This model works well for more strategic tasks in which the core competency should still reside in-house. For more complex projects, the level of coordination and changing skill set mixes required can become burdensome in this model. It should be noted that there is a blurry line between team augmentation and doing everything in-house. The trick is to remember your core competencies. If you find yourself building an in-house team of high-level software architects (or having to commit to long-term contractors), but your business is selling shoes … you might want to look at a strategic partnering model.

Strategic Partnering – Strategic partnering involves outsourcing a significant portion or entire functional area that is not your core competency to a trusted partner. It is different than simply shipping off a small project or augmenting an existing team; it means you have created a relationship of shared risk and reward where each side focuses on its area of expertise.

As an example, let’s consider a software services company that chooses to outsource development of its products to a strategic partner. The responsibility for understanding the customer, as well as defining the product roadmap and functional requirements, resides in the software services company, while the actual “coding” is done by the outsource partner. This is analogous to how cars are made. Ford motor company designs and performs the final assembly of a vehicle, but outsources manufacture of significant components to different partners around the world.

Strategic partnering is actually akin to choosing a global outsource factory. The partner is responsible for the output. You don’t worry about the changing team size, project management and skill mix needed to build the “component(s)” for which you have contracted — you measure by the output results. Much like car-factory suppliers, you measure by the correct output being delivered on schedule, built to your specifications, and within your quality parameters.

The supplier of IT services builds a deep understanding of your business and is an important extension of your organization, not just a myopically focused project team. The tactical implication of this relational difference becomes clear the first time a market-driven change to the project comes to life. Rigid projects that ignore changing market realities rarely succeed. And strategic partners are focused on long-term value, not schedule-driven penalties and bonuses.

The strategic partnering model also adds significant project management complexity. Outsource organizations that are not familiar with truly partnering will fail on this aspect. Project management must become cross-organizational and often significantly time-shifted due to the global nature of outsourcing. Having a senior project management group that is able to effectively communicate between entities and that has defined clear paths of escalation to quickly address the inevitable questions on either side is critical.

There is one significant departure in IT from the car-supplier analogy used earlier. It is normally not feasible to have multiple suppliers for the same IT “components.” You only need one e-mail service. You only need one CRM system or supply chain system. This sole supplier model means you have to carefully choose your strategic partner.

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  • Brian Wolf

    May 21, 2012

    You made some decent points there. I looked on the internet for the issue and found most individuals will go along with with your website.

  • Ronald B. Thompson

    June 28, 2012

    Rick you did a great post. Have fun reading it and I want to say that I’ll be looking for your next post.

  • Bill C

    July 6, 2012

    Rick, this is a great resource for information on IT outsourcing. I think a lot of the hype around outsourcing goes without factual knowledge. You certainly gave me enough ammo to know the way outsourcing works and the correct ways to go about it. Thanks.

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