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Should I use Outsourcing?

March 9th, 2010

Outsourcing, the reallocation of tasks to a remote location, normally in a cheaper region, has been with us for over a hundred years in the textile industry but has also been growing in IT for nearly twenty years. It has been powered by the arbitrage between the living costs in countries with high costs of living (Over $3,000 per month) and locations where living costs are often below $1000 per month. The savings are not 66% though, particularly where the process is being driven from the client location as extra definition, training and communication steps and governance are added in order to manage the workflows and service levels. The end process is better managed and more repeatable and retains a 20 to 50% saving for IT build or maintenance. As it is the communication at the interaction point that requires more management the larger the project the smaller the interface proportion allowing significantly greater savings to be achieved.

The subject of outsourcing is unfortunately mired in prejudice, self interest and nationalism. People tend to be behave is if they had one of two strongly held views. One that people in country C can do anything, and one that people in country C can’t do anything. Both ideas are foolish and clearly say more about our predispositions than the facts. Vendors who train and manage their people are needed,  the vendors need to have the right skills sets and the projects need to be setup with governance models which allow the relationships to work. Established vendors have far greater experience at making this work and have significantly higher success rates and quality metrics than first world consulting companies just because they are handling more projects and know that the quality of their project delivery is what their brand depends upon.

There is a, frequently unstated, objection regarding the moving of work offshore or to less expensive communities in terms of preserving local jobs. The consequences of job relocation can be survival in a competitive market but it can also be a loss of jobs in areas which have been use to having a larger proportion of the better paid jobs and as a result are higher cost locations. From an ethical perspective though the idea that available work shouldn’t be done in less wealthy locations is clearly self interest as the geographical equalizing of labor costs is caused by numerous instances of families and communities in less privileged areas receiving work and being able to put money to much more important basic uses than in expensive locations.

Software development as a process is well understood in terms of the factors that effect its outsourcing and which systems are going to require special treatment. When it comes to more general Business Process Outsourcing (BPO) you outsource a function as a series of processes that perform some service. Processes need to be assessed for their suitability. The number of interaction points that are going to become remote are a significant factor; the latency of steps in the process etc. etc. The incredible advantage of business process outsourcing is that the supporting services be they administrative, human resources or IT can all be provided locally at tremendous saving.

All of this setup and management is a critical part of a successful outsource relationship.  Some processes do not have sufficient regular work to give a sufficient return on the setup and management though it has to be said that this is a problem for the business even performing the tasks in house and it may be that an outsourcing assessment is an opportunity to eliminate some of these. Rapidly changing significant processes can also be a problem not so much because the structures can’t be dynamically changed but more because of the contractual nature of the arrangements used. If your business is doing different activities in different month unpredictably it would need to be possible to renegotiate SLAs repeatedly which would only be productive for large relationships.

Smaller units of work can be outsourced as tasks but there is a need to describe the tasks and set parameters around them for them to be successfully completed. As a result the tasks need to be repeatable or easily describable and assessing the effectiveness is difficult if the tasks are not recurring. Functions involving less than three full time employees are difficult to outsource other than on a per task / piecework level though. Below that point the management of the relationship and governance are going to be too significant an overhead. The benefits of per task allocation would have to be assessed by reviewing a selection of the tasks below that size.

Another decision point of discussion is if key functions should be outsourced. When most companies have started outsourcing they have begun with less critical functions or internal support functions. This allows the organization to learn how to manage the relationships. It is critical that these early relationships are setup successfully because if not the organization can become soured to the process for many years. The choice of these early functions though does not imply that the primary functions of the organization shouldn’t be outsourced. They clearly should be as they are the major cost drivers and are likely to have sufficient scale to realize benefits. Where the business process is the primary source of brand uniqueness there may be a wish to carefully manage the visibility of the process or to retain key stages involving for example pricing disclosure.

Security can in general be a concern. Some regulatory frameworks allow subpoenas more easily than the client location so there may be a need to mask and anonymize data before it is transferred. Regulatory concerns or management preference can also be cause for masking data. In general the more common regulatory processes are reproduces by the larger outsource vendors and adherence to security procedures is better than in many organizations resulting in the offshore locations having fewer cases of criminal use.

An additional advantage of outsourcing, particularly with larger vendors, is the scale of the campus environments that you are working with. For any particular skill set there will be many more people on their campus who have any particular skill than in most organizations. For the larger vendors the individual campuses are over 5,000 staff allowing somebody to seek guidance from a similar person working for another client.

If you think you have a function which may benefit from outsourcing we would be very happy to discuss the options with you. +1 (646) 502-7477

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  1. April 5th, 2010 at 21:58 | #1

    There are many factors which should be considered when outsourcing. As it has many benefits though it will be no doubt that many businesses will consider outsourcing many of their tasks.

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