Many people think of outsourcing as a way to cut costs, but after nearly two decades of global outsourcing, we know that outsourcing initiatives don't always yield the expected value. In next month's issue, we'll explore the many factors organizations must address when deciding where best to source IT services. You'll hear how one company's single-minded focus on cost cutting led it to kill the project that laid its golden eggs -- and how its competitors stand to benefit as a result. You'll learn techniques for designing successful outsourcing relationships so your initiatives deliver their promised value. And you'll discover that, when it comes to offshoring, much of what you "know" about outsourcing just isn't true. Whether your developers are down the hall or across the world, you'll want to join us this month for a lively debate on this always hot-button issue.
"The decision to insource or outsource portions of, or all of, your company's IT efforts is largely based upon the strengths and weaknesses of people -- both yours and the supplier's."
-- David N. Rasmussen, Guest Editor
Every Company for Itself
No matter how well written the contract with a third-party developer may be, the parties always have different business interests, which may end up in conflict. Be particularly careful when sharing your intellectual property with a vendor, or you'll find your know-how being peddled as their "best practice."
All for One and One for All
Outsourcing vendors have a strong interest in protecting their own IP. They also have a vested interest in protecting yours, because they want to build their reputation as trustworthy suppliers. A good governance process will ensure that your interests and your intellectual property are protected.
Opening Statement
Welcome to this issue of Cutter IT Journal. This month we are examining various perspectives on the pros and cons of outsourcing and insourcing.
Our discussion starts with the premise that outsourcing may no longer be an issue primarily of cost, but rather one that involves a more complex set of business issues. In the call for papers for this issue, we considered a number of questions:
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Will the offshore outsourcing trend continue to grow, or is there a new trend toward repatriation of IT services? If so, why? Where?
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Can companies in higher-labor-cost countries recapture a leadership position in IT services? If so, what services and why?
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What are the critical success factors for outsourcing? For insourcing?
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Where are the IT experts found and at what relative cost?
This issue of Cutter IT Journal presents the opinions of five senior IT managers and consultants on these and other challenges, based on their respective experiences. Our collection of authors represents a cross-section of international perspectives on the topic. Our first author, Jens Coldewey, is based in Munich, Germany, where he has delivered consulting services to major national and global clients. Dr. Sara Cullen's background includes education in both Australia and the US. An American living in Australia, Cullen has spent the past 15 years working in the Asia-Pacific region.
Dr. Tushar Hazra studied in England and finished with five languages under his belt. After working in Spain, Italy, Germany, Brazil, and Australia, Hazra has lived in the US for the past 20 years, serving a variety of companies in the insurance, healthcare, and financial industries. Dr. Natalia Levina is an assistant professor at the Stern School of Business at New York University. She is originally from Ukraine and taught in Russia, Ukraine, Armenia, the Czech Republic, and India before settling in the US 17 years ago.
André Kuper was educated in the Netherlands and has worked in both Europe and the US. He now resides in the US, working with outsourced operations in India, China, Germany, France, and Singapore. His coauthor, Bublu Thakur-Weigold, is of Indian heritage, was educated in the US at MIT and Georgia Tech, and now lives in Germany. Her consulting clients have primarily been in the consumer packaged goods and heavy manufacturing industries. As for me, I am an American who has lived in Saigon, Singapore, Melbourne, Sydney, and Hong Kong and worked with global business units in Tokyo, Dubai, Manchester (UK), and the US.
We start this edition of the Journal with an article by Coldewey, who provides a case study from the insurance industry of a successful inhouse development team that was subsequently outsourced to a third-party service company. Although not specifically stated in the article, it is clear that differences in corporate culture and business priorities were significant factors in the ultimate project failure in the new outsourced environment. Even though many of the project personnel remained the same -- as the team was transferred to the outsourcing company -- the new corporate environment helped contribute to the failure of a previously successful software development project.
Coldewey concludes "If you have the choice [to outsource an agile project], don't do it!" As he told me, "When outsourcing, the relationship between client and vendor has to reflect the role of the outsourced service. When outsourcing commodity services, you may run a low-cost strategy, but when you outsource a strategic project, caution is necessary." He further noted that the agile project in question had given the company a strategic advantage for several years. After the team was outsourced and put under forced saving, the strategic advantage was lost and diffused to the company's competitors.
In Cullen's article, "Designing Successful Outsourcing Relationships," she also describes the challenge of cultural fit as a critical success factor in successful outsourcing deals. She provides several examples as she describes elements of an Outsourcing Lifecycle model that incorporates nine discrete steps for achieving successful outsourcing relationships. She reinforces some key factors in building and managing these relationships, including communication, culture, planning, behavior, and measurement. Cullen includes in her Outsourcing Lifecycle model a "relationship values chart," which can be used to describe the behavior expected from both partners and some mechanics for measurement. These are useful tools, not only for managing outsourced business ventures, but for all forms of major IT initiatives, whether insourced or outsourced. She concludes that "outsourcing is neither simple nor a transaction -- it is a complex strategy for managing the delivery of services. The relationship should be part of that strategy, not an unintended consequence of executing a contract."
We find a slightly different set of critical success factors for outsourcing relationships in Hazra's article on smart sourcing. Yet it would not be difficult to map his more "behavioral" factors with Cullen's more "procedural" ones to come up with a sourcing model that effectively combines both. (This challenge will be left to the reader.) Hazra introduces the concept of "smart sourcing" by dispelling some of the myths of outsourcing (I call them uninformed assumptions) as well as discussing a few truths. Yet his underlying theme is consistent with those of Coldewey and Cullen as to the need for detailed planning and effective execution by both partners in order to meet stakeholder expectations for outsourcing initiatives. But isn't this fundamental to any IT initiative, whether sourced in or out?
Natalia Levina hits the "in or out" question head-on by describing a set of decision parameters to help in resolving this dilemma in the offshore context. But while she provides several examples from her field research, she does not answer the question. She does state that "as long as offshore economies keep growing at fast rates, the captive vs. third-party decision is more likely to be driven by availability and the ability to train and retain qualified human resources and coordinate work than by other factors." This is because the real answer to the question, as with so many in IT, is "It depends." Most often it depends on the skills, strengths, and experience of people. And that is as it should be, because IT is in essence a people-focused business: computers process data, but people process information.
Finally, we get to look inside the outsourcing practices of one of the major corporate players in the IT industry (Hewlett-Packard) in the article by Thakur-Weigold and Kuper, "Making Outsourcing and Offshoring Work." They get to the heart of the matter when they state, "IT needs to be a process innovator. Instead of merely managing cost and remote resources, all of which are execution details that can be handed off to others, IT professionals should focus on lowering the total cost of ownership of IT assets while defining value for the enterprise they serve." Whether major IT programs and services are managed inhouse or out, whether they are performed offshore or on -- these may actually be tactical considerations for maximizing the business value of the enterprise.
The decision to insource or outsource portions of, or all of, your company's IT efforts is largely based upon the strengths and weaknesses of people -- both yours and the supplier's. The articles in this issue of Cutter IT Journal provide some guidelines, tools, experiential knowledge, and suggestions for how you can go about making that decision. One of the common themes in these articles, however, is that regardless of which way you might go, the governance considerations are usually larger in scope and magnitude than most companies estimate.
It takes a significant level of dedicated effort to manage an internal IT operation in order to successfully deliver information services for all aspects of a corporation's business. Critical success factors include achieving excellence in the areas of communication management, cultural management, and delivery on commitments. IT management must be champions for excellence and attain high levels of trust. The same can be said if those services are outsourced.
So what is the conclusion of our guest authors regarding sourcing -- should it be out or in? As with most IT endeavors, the conclusion seems -- again -- to be "It depends." The choice depends on the capabilities and attitudes of people, the business practices used, and the culture and relationships of the participating companies. There are also two additional common themes throughout these articles:
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Outsourcing initiatives are not necessarily easier, cheaper, faster, or better than insourcing.
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Consideration of core business attributes is a fundamental decision factor.
In the end, there seems to be a very simple answer to the question posed in the title of this month's issue, "Sourcing -- Out or In?" We should probably just change the conjunctive from "or" to "and."
