As we've worked with and are in touch with several outsourcing companies, this weeks article by Norhternlight had me interested.
There's no denying it that it can be a painful process to outsource a whole department for example though people have always stressed the long-term cost benefits. This story takes a twist in that instead of underlying the savings it stresses the improved time-to-market. Knowing how fast teams can be assembled in countries such as Vietnam or India with highly skilled people I can only agree. In fact, for our product transLucid we are looking at using an outsourcing supplier to continue its development because 1) lower costs and 2) the availability of skilled workers.
Here's the article. I hope that I am not infringing on any copyrights of Northernlight here. I can only recommend to try out their business research solution. Personally, I unsubscribed for different reasons (mostly due to a lack of a need for market research material) but somehow stayed on their mailinglist.
-----------------------------------------------------
General Motors' recent decision to outsource roughly $15 billion worth of IT contracts over the next several years may seem to be just one of many such transactions going on in the outsourcing arena; and it is. But more than being just another example of the current state of the market, it is an indicator of the new direction it may be taking. One interesting thing about GM's move to outsource is the rationale behind it; it wasn't only money. For various reasons, saving money through outsourcing is not the easy win it used to be; this is ok with many companies as they now look to outsourcers to fulfill different needs. According to GM Chief Information Officer Ralph Szygenda, GM's outsourcing move, "Lets GM focus on innovation rather than spending a lot of time on managing its suppliers." GM is not the only company to realize that initial savings may not be the best primary driver when considering outsourcing.
Lakshmi Narayanan, CEO of Cognizant, a company making a name in outsourcing, said that many companies are looking to India because they are, "Coming to understand that companies like Cognizant can help them assemble teams and projects much faster than they could in the U.S. That's the real value, time to market." Narayanan claims Cognizant could have a solution in the same amount of time it would take a U.S. company just to assemble a team.
Another aspect of the GM story that is worth noting is the contract model. Of the $15 billion that GM is looking to outsource, about half is in 5 year contracts with the remainder expected to be paid out over the next few years as new projects come up. This marks a shift away from the traditional 10 year contract model and toward a more flexible working relationship with contracts awarded on a more as-needed basis. If GM's new strategy for managing outsourcing works well, it could become a model for other large corporations. "This is a tipping point for IT," says Robert McNeill, principal analyst at Forrester Research; and Forrester believes a tipping point is necessary.
"Forrester's most recent research indicated that over 25 percent of North American customers are dissatisfied with their outsourcer's ability to hit cost and SLA targets," and further that, "Failure rates for outsourcing range from 25 percent to as high as 50 percent." It may seem startling, on the heels of the GM announcement and the positive press that outsourcing is getting recently, for Forrester to say that the market is unhealthy. Forrester acknowledges this but points out that even though the number of deals is increasing, "The average total contract value (TCV) of outsourcing deals has steadily declined for the past three years."
Combined with a legacy structure that does not allow most outsourcing deals to payoff until the later years of the contract, if they pay off at all, the result has outsourcers continually signing contracts at smaller profits.Dealing properly with the challenges facing outsourcing may require more than tinkering with the current model. Forrester calls for an altogether new model to be adopted by both vendors and customers; the model they propose is called, "Adaptive Sourcing" Adaptive Sourcing calls on the vendors to be fully aware of the life cycle of technology adoption and the customer's needs at various points throughout it. With this in mind contracts can be adjusted proactively to meet needs at the various points in that lifecycle. By adopting this strategy outsourcers can, "Retain business, forestall benchmarking and renegotiation, and improve profitability.
The model also promises to deliver to customers more strategic relationships with their providers, lower costs, and the flexibility needed so desperately." Discussion of IT outsourcing inevitably leads to consideration of its impact on the IT department, a department which is indeed being noted for its shrinking size. However, it is not necessarily evil U.S. companies shipping their work offshore that accounts for this drop; IT departments are likely to shrink over the next few years at least as much to diffusion as to outsourcing.
As IT skills become a part of business professionalism, workers from outside IT departments will be doing more of what were traditionally seen IT tasks and IT workers will begin doing more business facing work. Ironically technology is predicted to play a part in the decreasing size of IT departments. In 2004, one Gartner analyst predicted, ""That over the next 20 years, changes in computing technology will erase the need for much of the work that employs IT staff today." More recently Gartner has projected that, "By 2010, IT departments in midsize and large companies will be at least one-third smaller than they were in 2000."
