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IT Outsourcing for SMEs

IT outsourcing is nothing new. Or is it? There are several gotchas. But it is important to understand where we’ve come from to learn from past mistakes and take advantage of new opportunities. Read on…

Outsourcing vs. Offshoring

First, let’s differentiate between outsourcing and offshoring. Outsourcing is the act of contracting with another company to do work for you. Offshoring is a form of outsourcing that moves the work to other countries. Outsourcing (and offshoring) is very common in manufacturing companies. However, in IT, the trend really started to build steam in the 1990’s as companies tried to address a shortage of workers, a change in the type of work and competing global labor rates.

The main attraction to outsourcing came from meeting one or more objectives: economic, repetitive, expertise and time to market. In the past 10 years, the value from these objectives has changed quite a bit. In just the past 5 years, a whole new cast of “types” of outsourcing has come on the scene.

Management Overhead

One of the lessons learned from early attempts of IT outsourcing is the fallacy that entire processes can simply be moved to the outsourcer. In many cases, a local team is still needed to translate requirements and ensure quality of work performed. It could be a seemingly duplicate effort or simply management overhead. Understanding how internal requirements will be translated and quality confirmed is one issue. Factoring that into the value equation is important for TCO calculations. Many early attempts misjudged the amount of work it would take to manage the outsourcing relationship.

Labor Rates

A big draw to outsourcing, and specifically offshoring, was lower labor rates. Companies saw opportunities to perform work in other countries with labor rates at a fraction of competing rates in the US. Over the past decade or so, the difference in global labor rates has shrunk. While India is still able to perform outsourcing arrangements at lower costs, the value is not as great as it used to be. India is also challenged with finding enough people able to perform the work. In essence, it is becoming a sheer numbers issue. For the past 5-10 years, focus has shifted to the other BRIC countries. The BRIC countries are Brazil, Russia, India and China. Indonesia and the Philippines are two other hotbeds of technology outsourcing that are starting to make their mark.

Expertise

Labor economics are one factor that draws companies to outsourcing. Another challenge is when a company does not have the expertise to perform a task or create a product. It is possible that it either may not be as cost effective for them to create internally. Or it may be a specialization that is only needed on a temporary basis. For example, if a company needs to develop a solution in a language they aren’t used to, they have three choices. One, they could hire the staff to do it internally which would be costly and take time. Second, they could try to write the application in a different language that they have internal expertise with. Or third, they can outsource for the specific project. In either case, leveraging outsourcing arrangements may be a more cost effective solution.

Time to Market

A third objective might be the time to get a product or solution to market. The ramp up time to define, justify, hire, train and engage staff might be too long. Leveraging outsourcing arrangements provides a much quicker solution to leverage the expertise of services. For many, time to market may outweigh many other economic objectives.

Technology in Outsourcing

So, how does this all apply to technology outsourcing today? Today, more than ever, companies are leveraging outsourcing. And not just to solve labor challenges. Cloud computing is just one example of outsourcing in today’s technology world. The concept of leveraging technology services from another company is nothing new either. We’ve seen that with ASP, hosting and the like. What is new is the ease in which to engage services. The ease is already creating a mass movement into this new class of services.

Organizational, Process and Technology Changes

It is easy to get lured into thinking the implementation of technology is straightforward and relatively easy. That may have been true in the past. Today, more than ever, the implementation of technology requires two other cohorts to be successful and sustainable. Those two cohorts are organizational and process changes. Without those too, technology is just that…technology. As an example, just moving to cloud computing may seem like a simple enough change. But the reality is that processes and organizations need to change. Cloud is forcing IT organizations to pickup attributes similar to that of a supply chain manager. More specific examples include operational process changes for things like monitoring of performance and operations. Application changes are needed to consider available libraries and architecture requirements. Organizations need to change to consider how they model themselves to this new way of operating. And those are just a couple of relatively straightforward changes. It’s very different than the IT organization of the past.

Where to Start

Considering they myriad of changes, where do you go from here? The first step is to ensure that you’re looking at everything with a holistic viewpoint. Consider the true business value of the actions taken. Don’t just look at the technology or IT benefit. Also consider the implications to the organization and processes. Don’t get lulled into just thinking about labor and technology opportunities on their own merit. There may be more…or less. It is also possible the value may come from an area you weren’t expecting. The bottom line is to take a fresh perspective and try to avoid the cultural constrains of how IT organizations have operated for the past 10-20 years. Outsourcing and offshoring are both viable solutions and should be wisely leveraged where possible.

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