Workleaf

Interaction costs have been popularly used in the development of a general network theory for social sciences.  It has been used to illuminate the shaping of networks and the interaction within them. The same set of concepts can be applied to the world of outsourcing to illustrate the overheads associated with adding incremental supplier/vendor relationships to the existing set of dynamics for an organization. This is a crude attempt at answering the fundamental question of – Why are organizations still interested in vertical integration? Why are we not seeing organization frantically shedding all their non-core processes to external service providers while exclusively focusing on their core competencies?

Interaction can be crudely defined as — the searching, coordinating, and monitoring that people and firms do when they exchange goods, services, or ideas. In the realm of outsourcing, interaction costs are generally categorized under the relationship/account management category. The activities that come under this category include -

1. Searching, evaluating and identifying vendor(s),

2. Establishing a communication protocol

3.  Maintaining technology and people resources for the general functioning of the communication channels

4. The overhead of provisioning for these costs within the general operations of the organization/business unit

If interaction costs were negligible, an organization could in theory be atomized into a collection of individuals, geographically dispersed but connected by a communications network. In reality, however, substantial interaction costs and the human aspects of effective interaction limit the range of realistic configurations.

Firms trade off the value of specialization against the interaction costs associated with external suppliers when they set their boundaries and choose their focus. This is a choice that firms make based on business models and the general direction of where they want their venture to head. Technology has been one of the activities that has received increased focus in the recent decade, where firms have consciously chosen to consider the interaction costs of having to engage with external specialists. Firms realize and understand that, to include technology focus within an organization’s focus umbrella is a resource-intensive undertaking, thereby, justifying the interaction costs associated with engaging external specialists in this area. Companies trade off the effectiveness of alternative organizational forms against the interaction costs involved in managing them.

In theory, interaction standardization reduces interaction costs. Technology advancements and proliferation of standard communication tools & mechanisms (e-mail) have significantly influenced the standardization of some of the elements of interaction in a firm’s ecosystem. The growing use of networks/internet has created an explosion in the ability to interact. Vast improvements in connectivity and bandwidth technologies over the next five to 10 years promises to multiply the inter-active power of networks. But does it mean that we are moving closer towards the existence of atomic/network driven organizations? In other words, will outsourcing take-over as the inevitable skill that every firm in every industry have to build competency in? 

Increases in the rate of transmission don’t automatically translate into improvements in interactive capability, however. Most interactions have a human component that remains largely unaffected by technological innovation. Technology may enable us to write and distribute a memo very quickly, but it doesn’t tell us what to say or how to say it. These cultural and human factors have a significant role to play, in influencing the interaction costs in an organization’s ecosystem. These lead me believe that – although technology helps in reducing interaction costs, which in turn, facilitates a reduction in the overheads of engaging multiple external service providers, it does not exclusively promote an organization’s ability to evolve to an atomic state.

Implementing an outsourcing strategy is akin to a BPM implementation. Here, I am trying to draw a parallel between BPO and BPM. As with the BPM philosophy, an organization travelling the BPO road should -
1. Think big
2. Start small
3. Scale smart

… in that order.

The first step is arguably the most difficult one. Akin to a Business Process Reengineering project, the organization/business unit will need to build a Process Dictionary that consists of all processes that are candidates for outsourcing. A Process Dictionary is a list of all business process, the actors involved, inputs, outputs, process controls, triggers and business rules. The next step is to assign an order of priority to this list based on your business goals. This prioritization should, in a way, reflect the purpose that you are trying to achieve through outsourcing. It is important to note here that the prioritization activity need not necessarily reflect the value the process adds to the business. Rather, this priority reflects the importance of this process in achieving your outsourcing goals. For example, if one of the goals of your outsourcing strategy is to improve process efficiencies, then the highest priority should be assigned to the process that you believe is least efficient.

At this stage, the process dictionary will help you organize your team around the most important processes. Each process in this dictionary, should then be planned as an independant outsourcing project, with associated metrics to be measured, expected ROI, timelines, implementation plan, risk management plan and a vendor communication plan.

An Outsourcing Strategy implementation, then, follows the tried and tested Project Management Methodology. Note that there could be multiple iterations of each phase:

Initiate: By this time, the process to be outsourced is identified. An implementation team is assembled, which may also serve as the organization’s Outsourcing Management Office. Alternatively, the infrastructure and competencies of an existing Project Management Office can also be utilized. Not all team members will start to work on the project immediately, but their involvement is planned for at this time. It’s also critical to obtain executive support and explicit sponsorship. This is also a good time to identify and document all the business requirements in conjunction with the business and user community. The requirements here will include potential Service Levels that will need to be complied with and other qualitative terms of the engagement.

A subset of this phase – Analyze: This is the phase you rip the process apart and understand its details. This is also the phase to figure out how this will work as an externally delivered service. This may be achieved through case modeling, detailed process modeling and simulation, etc. This is also the phase where the vendors (or the team that will be delivering this process/service) become actively involved in understanding business requirements.

Design: In the design phase, the team architects the modified process as it needs to be delivered, keeping in mind the business requirements, and the interfaces to both internal and external systems. The “to-be” process flow determines the appropriate service providers, their interfaces, fault conditions and so on.

Implement: In the implementation phase, the team decides the environment in which the process will run. Often, this involves installing any Management Systems (e.g. BPMS) that helps orchestrate the run-time process. These systems also provide tools to make the end-to-end process development and implementation easier.

Transition: This is the rollout phase where the new processes are introduced as the old ones are phased out. Depending on the criticality of the process, the switch may be done over a weekend, or the old and new systems may run in parallel for a while until the new system can take over. The deployment is also monitored for a period to ensure smooth transition.

Monitor: Many implementations fail because organizations/business units go with the philosophy of “Out-of-sight = Out-of-mind”. If the process is critical to the enterprise, appropriate time must be allocated to monitoring the transitioned process(es). The aspects that need to be monitored are largely driven by the output of the “Initiate” phase. For example – one aspect of monitoring include the metrics identified in the “Initiate” phase that will measure the effectiveness/efficiencies of the new process.

Control: The new process then transitions into an operations and maintenance phase. Here, new requirements or changes to existing processes can be accommodated in a structured manner as the business continues to run.

Once a process reaches maintenance mode, the organization should focus on scaling the operations as governed by the Process Dictionary. The whole process is highly iterative where feedback from the initial processes outsourced dovetail into refining the Initiate/Analyze stages of the future processes.

What makes some outsourcing arrangements successful, while others fail at the first hurdle? In order to identify the reasons behind outsourcing success and, conversely, failure, sourcing consultancy Quantum Plus and law firm Bird & Bird surveyed people involved in managing outsourcing relationships.

This is a very high-level bird’s eye (1000000-feet) view of the issues and challenges facing any outsourcing deal out there. There are many points mentioned in this article that I agree with. But on the other hand, it leaves out some crucial piece of information that might have made this article a great read. It does not mention the profile of companies or people surveyed. It does not talk about the composition of service buyers versus service providers. Overall, I would like to see more details on the survey population. But having said that, this is definitely a great piece to get a general understanding of some of the most commonly experienced issues with outsourcing.

To summarize (in case you don’t find the patience to click on the url and read the whole thing), the most often seen issues in outsourcing are -
1. Expectation mis-match between the client and service provider
2. Reliable measurement of service levels rendered
3. Lack of innovation from the service provider
4. Internal expectations mismatch, between the expectations of an outsourcing engagement and internal management expectations

Overall, the stress is on expectations mismatch and the various reasons for which this mismatch occurs.

Happy reading, and if you like it, Digg it!

On a related note, I would like to hear what you think about these issues? Do you agree with them? Do you think this applies only to a certain types of deals and this is a gross generalization of the issue?

The original research findings summary is available here – http://www.softage.ru/outsourcing/index.php#34

read more | digg story

Earlier in January this year, TPI, the Outsourcing Research & Advisory firm release its usual quarterly report on the health, numbers and trends observed in the outsourcing contracts that were seen during the later part of 2006. This report observed that there was a significant decline in the Total Contract Value (TCV) in some of the bigger outsourcing deals seen in the observed period. Although it rang some alarm bells in the industry, things stayed calm when observers later found that the service providers have been reporting a reduction in TCV because buyers were trying to do it themselves – DIY Outsourcing! (More on that in a different post).

We’ve been seeing reports of mid-market organizations testing waters with DIY Outsourcing as well. Now, assuming that the credit market situation actually results in a financially stressed IT department, we should be seeing organizations changing tactics on their DIY strategy. Although the whole notion of outsourcing will not go on the back-burner (due to the obvious cost benefits), we may be seeing these deals flowing back into the service providers hands. Thus, we may see an increase in the TCV number in the next couple of quarters.

But are outsourcing service providers, especially the offshore strategists, ready to handle a sudden (even if temporary) increase in deal numbers and sizes?

The recent credit market turmoil, spurred by the sub-prime mortgage industry fallout in the U.S., has created ripples in the financial markets across the world. Although markets in the U.S. were affected the most, the impact has also been felt in the EU, with the recent announcement from Citigroup about it’s management shake-up.

As economists and bankers ponder over the possibilities of a global downturn, it is deja vu time for the folks in the outsourcing industry. Circa 2001, the “Post- Bubble” era ushered in a greater acceptance and recognition of ITO and BPO as a standard strategic component in various industries. The same feeling seems to be creeping in, albeit in a different avatar, this time around.

Along these years, the industry landscape has changed. Among service providers, we have seen a growing maturity in client service and delivery efficiencies. With a rapid proliferation of new entrants, the incumbents have had to fight back with competitive rates, and an aggressive inorganic growth strategy. We have also seen some surprising mergers and acquisitions in the past couple of years (remember Keane?). Among the clients, first of all, outsourcing has become an accepted component of an organization’s overall strategy. These days, clients do not need to educated about the benefits of ITO/BPO (although the same cannot be said about executing on those strategies). Clients have moved beyond the basic premise of labor arbitrage when factoring outsourcing into their grand plans.

Given these changes, it would be interesting to see how the outsourcing industry is affected (or, should I say “influenced”?) by the current market turmoil. An easy prediction to make here would be – the current scenario will result in IT budget cuts in the forthcoming quarter and the next year. This would, in turn, force executives to pursue their outsourcing strategy more aggressively, with a higher emphasis on realizing cost savings. This would result in an increase in the price pressure for service providers (as if the weakening dollar was not enough of a problem already). Thus, service providers will end up investing in technology to increase delivery efficiencies further, and to bring operational costs even below their existing levels. Maybe we will see an increase in Tier 1 service providers (Read – Accenture, Infosys) from Tier 1 locations (read – India, China) outsourcing their contracts to Tier 2/Tier 3 providers at lower cost (emerging) locations.

And I wonder of all this will happen within the next 12 months?

Comments?

The concept and importance of Multisourcing has been touted for quite some time now. Heck… there is even a book titled “Multisourcing” (which is a good read, by the way). Honestly, I did not give much thought to it, dismissing it as yet another keyword born from a world so obsessed with re-inventing its jargon list every year.

But today, I cam across an article in the Economic Times (www.economictimes.com) that made me think about the impact of multisourcing on Service Providers. You see, till now, I have only thought about the trend of Multisourcing and its impact on Outsourcing Clients (or buyers). Probably because this trend was initiated by the client side of the outsourcing spectrum. It was quite easy to visualize the challenges in outsourcing a business process (or an IT project) to multiple vendors. But what about the Service Providers? How are they impacted by this emerging trend and what challenges does it create for them?

This article (which is about Infosys and its latest technique of preventing employees from defecting to competitors) had a statement that caught my eye -

“Normally, companies ask employees to sign non-compete clause at the time of making the job offer. At least, partially this may have been triggered by the fact that increasingly now companies while outsourcing key IT functions, are splitting one project among multiple vendors rather than giving it one to derisk themselves. At times, techies could easily negotiate higher salaries doing the same project for the same client by simply moving from one company to another. Such clause will hopefully restrict it. “

Hmmm… interesting, isn’t it? Clients tend to split a project across multiple vendors to in an attempt to derisk themselves. But at the end of the day, the risk is being passed over (at least, partially) to the Service Providers. I wonder if there is any way to mitigate this risk, apart from making employees sign severe non-compete agreements, the enforcement of which, is still a grey area.

Comments?

The other day I was talking to an acquaintance, discussing how the idea for Alef was born. Somewhere along the line we started talking about the Software as a Service (SaaS) model and its relevance to outsourcing. This acquaintance, an experienced person who has directly or indirectly been involved with various start-ups, asked me a very simple question: Why would a company want to own anything?

On its own, the question may not make sense, so let me elaborate on the context. We were talking about SaaS and the convenience that it provides, especially to mid-market firms in reducing the need to invest in IT infrastructure maintenance resources. But then, we were talking about the risks of not owning one’s software and related infrastructure, when this question popped up.

To be honest, I was taken by surprise. Sometimes, in a conversation, when we are talking about issues that are fairly complex in nature that may have fairly complex answers, simple questions as this tend to take you by surprise. Switching back to think about a fundamental aspect of SaaS took me by surprise. I did not give a convincing answer apparently. It was evident by the way in which the conversation moved on to discuss the various intricacies of Japanese Sushi and its rise in popularity in this part of the world.

But that did not prevent me from thinking about it later on, usually when I ponder over such unanswered questions and other mysteries of the Universe during my “think time.” Duh! It seems so simple. If SaaS gives an organization the choice of owning something without really committing to it to a long term, why isn’t everybody onboard already? Why are technology marketers investing so much time and energy in educating the market about the benefits of SaaS?

At a fundamental level, I believe that an organization would want to own what it wants to protect. Intellectual property, for example. Will organizations want to own its payroll process? Not necessarily. Isn’t that why we engage with companies like ADP to do our payroll processing for us? Moreover, it is a resource-intensive activity that does not generate significant value to justify the amount of investment to initiate and maintain it internally. At the end of the day, payroll is payroll.

So here’s a keyword: value. Would an organization want to own anything that it values? Maybe. From a value perspective, does it make sense in owning and controlling a specific set of software infrastructure that contributes to increasing or maintaining our competitive advantage, thus creating value in ownership? Hmm… now we are getting close!

So, if I’m an automobile manufacturer and I use assembly line scheduling software, the internal workings of which creates significant competitive advantage for me, is it valuable? Maybe. Does it make sense to “own” that piece of software and related infrastructure? I guess the answer to this would be a resounding yes.

So, maybe, we should look at a SaaS option for all software and related infrastructure that may not offer significant value under complete ownership to the organization. For the automobile manufacturer, it could be an RFP management tool. Although I am not trying to say that the process of managing RFPs does not add value to the organization as a whole, the fundamental process of managing it may be so common and commoditized, it may not be very different from how its industry peers are implementing the process. It may not be of a proprietary nature — as is the assembly line scheduling algorithm — thus creating a significant reason to look for SaaS options. What is the point in owning a software that does not help in creating value to your organization when you can simply use it instead?

If the reasoning mentioned here were to be used as a basis for decided when to go SaaS and when not, what about outsourcing? Isn’t the reasoning behind outsourcing also about creating value? The core versus non-core process debate? But enough for one post. Maybe that’s a topic that deserves a post of its own.

There are subtle signs when an industry stops being at the periphery of business and starts moving into its core. This is the time when an industry becomes noticed and talked about frequently in the media and general business circles. For the past couple of years, the outsourcing industry has been sending out such feelers, which indicate its increasing maturity, thus fueling its rate of adoption and increasing its importance among the corporate managers.

One such feeler came in the form of an article yesterday, titled “Boutique Outsourcing Advisory Firms Come of Age”. Quoting the article here would be easier than re-phrasing it to convey its gist -

“Given the pressures to make their outsourcing strategies work, organizations have increasingly turned to this band of advisory firms that specialize in outsourcing for information about service providers and their global delivery capability.”

“More than a third of the outsourcing contracts have been handled under the guidance of these firms. Forty-seven percent of such deals are being executed under the guidance of sourcing advisers”

Will keeo you posted as and when further such signals emerge from the market.

ODesk.com, an outsourcing marketplace provider (www.odesk.com), announced yesterday that till date, contracts/projects cummulatively worth $10 million have been executed via the ODesk infrastructure. ODesk was recently featured in the RedHerring 100 Finalists list and positions itself as an on -demand global workforce provider.

I have personally believed in the value provided by upstarts like ODesk. Alhthough marketplaces like E-Lance and Rent-a-Coder have existed for a longer duration, companies like ODesk go beyond the aspect of a market place and try to provide tools that enable its clients to function effectively in that marketplace. Although I am skeptical about its scalability in terms of, what project sizes can it handle, I am sure it will satisfy small and individual projects (Psst… I heard somewhere that the Technorati website was built by outsourcing it to someone via ODesk – I am not completely sure when & where I heard this information though!)

With the conclusion of Gartner Inc.’s Outsourcing Summit last week at Dallas, we should be expecting to see some analysis, forecasts and general opinions on the Outsourcing industry in the media this week. Here’s one of them.

This article in Computer World highlights the issue of rising costs in Offshoring to India and the alternatives that were discussed during the summit. To quote some of the interesting snippets from the article -

“One conference attendee whose company runs its own offshore development facility in India agreed with Gartner’s assessment of the wage increases in India. “We’re finding that ourselves,” said the attendee, who requested anonymity. He added that his CIO asked him last year to investigate other countries, and his company is currently looking at China as a possible alternative for offshore IT work.“

 The primary motive behind sticking with India seems to be the location’s ability in providing the assurance of availability of a large pool of skilled workers. Although information executives are not against looking at other regions of the globe, the standard of service that has already been established by India based service providers seems to be hard to match, by providers from other locations.

But I have always found that the most interesting piece of information in such articles is always in the discussion that ensues between the proponents and opponents of outsourcing in the discussion thread. The discussion thread in this articles seems to indicate that it is going in a similar direction as well!

Stay tuned… more analysis and forecast will follow.

- Vinod.