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.

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.

Business Week published a special report recently on the challenges of looking at outsourcing beyond Bangalore. In fact, it has a whole bunch of outsourcing related articles linked to this report (if you access it via the website).

I felt that it did a great job of putting together a concise list of “soft” issues associated with outsourcing to different geographic regions. It talks about employee attrition, intellectual property protection, etc. All of them, which are, pretty much burning issues in the subject area of outsourcing these days. You can find the report here.

P.S. – Don’t forget to take a look at the discussion thread (a pretty long one) created by the readers. Different people from different parts of the world. Quality discussion in general.

Trust the “Outsourcing Journal” to come up with predictions in the outsourcing market for 2007. Although obvious, it does prove to be useful articulation of what is bound to happen in this hyper-growth market. Summary of the trends -

1. Start-up costs go down (supplier margin compression, increase in competition, etc.)
2. Strategic choices increase (e.g. – location)

3. Supplier market will consolidate (due to a super increase in the number of suppliers)

Overall, looks like a good time to get into outsourcing – for those who have been toying with the idea this year.

Start-up costs are tumbling down these days (Yes… it has almost become a cliche these days!). Some of the reasons are – Open Source, Offshoring, Online Marketing, Cheap Hardware.

All that is fine, but how does a person actually get to these resources and see what is the most cost-effective way of ploughing ahead with her/his ideas? My recent discovery as an answer to this question is the “now famous” tech blog – http://www.techcrunch.com/

Apparently, there are so many start-ups out there providing services that could, in turn, help other start-ups cut down their initial expenditure significantly. Recently reported start-ups were – Amberjack and Weebly. Amberjack helps you build a “site tour” for first time visitors pretty easily. Weebly helps you in creating Web 2.0 ready sites.  I will personally give these sites a try and see if it helps in my attempt moving forward with Alef’s product development. Till then, I strongly recommend subscribing to TechCrunch’s feeds. You never know what start-ups are out there that are providing exactly what you need to get moving!

I recently read somewhere (I forget exactly where) about the 3 pillars of offshore outsourcing. BTW – If the author of the original piece were to read this, please add a comment and I shall add the credits to this post.

The 3 C’s of Outsourcing – Coordination, Communication and Control.

These are the 3 key factors that pretty much govern everything there is to know about Offshore Outsourcing. Right from the question of “Should I go offshore?” to “How to manage an offshore outsourcing engagement?”, I believe that these 3 factors answer almost all the questions.

For the sake of this discussion, let us restrict ourselves to Application Development Outsourcing. Strategically speaking, the decision of ’should this be offshored’ (?) can be answered by honestly assessing and guaging the depth/expertise needed in these 3 areas -

1. Coordination – Is this application development initiative coordination intensive? e.g. – Early stage product development projects usually are. Coordination intensive engagements need highly mature processes and tools (apart from strong human interaction). Offshore outsourcing can be considered if organizations are equipped with tools to handle coordination intensive engagements.

2. Communication – Culturally, some firms may believe in and rely on planned communication rather than ad-hoc communication. Typically, in a start-up environment where processes are still being built, project communication is more ad-hoc than planned. In an offshore engagement, how well is your organization, your project and your service provider geared towards handling engagement specific communication? Again, processes and tools are important here. For example, if your team believes in ad-hoc communication and if your service provider is culturally a ‘planned communication house’, then you need to rethink on how to handle your project communication needs.

3. Control – How much control do you need and how much of it are you willing to relinquish? In an engagement where the application lifecycle has reached a stage of maturity (only bug-fixing and incremental application enhancements are involved), control can be established with tools.

Irrespective of where you stand in your outsourcing intiative and whatever your perspective on outsourcing is (strategic, tactical or operational), the 3 C’s will help in creating and correcting your path in managing an outsourcing engagement successfully.

As usual – Comments welcome.

I haven’t seen outsourcing service providers position themselves in the “Business Continuity” service provisioning sector, although I see their services being used for that purpose – Either intentionally or otherwise. A few months back, the Outsourcing Institute hosted an awards ceremony to recognize exceptional service in the various sectors of outsourcing services. One award caught my attention – Wipro won the award for their service towards one of the leading airlines in the U.S. for providing exceptional service during Hurricane Katrina. Apparently, this airlines’ customer support infrastructure was severely affected during the hurricane and they needed a quick and effective failover option. They looked towards Wipro, who were already providing them with customer support services from offshore locations, to help them in this regard. Aparently, Wipro moved quickly to take-over the additional overhead without a questions, thus giving the airlines, sufficient time to get their U.S.-based infrastructure back in place.

This example goes to show that corporations need not necessarily look at outsourcing as a cost cutting initiative. In today’s highly regulated and compliance intensive business environment, enterprises are hard-pressed to devise cost-effective ways of compliance. Compliance also includes business continuity and disaster recovery. Offshore service providers would be an ideal candidate since they not only provide offshore locations for business process mirroring, but they also provide significant cost savings.

Why aren’t enterprises looking at outsourcing as a “one stone two birds” solution? I think that it is up to the service providers to include this in their marketing/sales pitch. These days, when hardware costs are going down, setting up mirror infrastructure will not prove as expensive as it was a few years ago. Therefore, I beleive that outsourcing service providers should include business continuity as a part of their service offering and get into an educating mode in their sales pitch. What differentiates service providers from each other anyway? Most of the large enterprises are already aware of the costs, benefits and risks associated with outsourcing. The need for educating the business user and evangelizing the process of outsourcing is in its decline. Thus, outsourcing services (in general) is becoming a commodity. Service providers need to have an educational component in their sales/marketing pitch to differentiate themselves from other plain-vanilla me-too providers. Business Continuity is one such area where the benefits are evident upfront.

Would love to hear your comments on this one.
(By the way – these are are not “random ramblings”. I was a part of business continuity planning effort for an international bank during Y2K. It sucked ‘coz I had to spend my New Years’ eve on December 31st 1999 watching the clock tick past 11:59:59 and have my phone ready in case everything failed!)

I have been reading a few articles recently regarding issues in outsourcing and their possible solutions (I am writing one on my own!). I observed that a common thread ran through these documents – “ITO fails due to immature processes at both sides of the engagement”. Apart from these, bad vendor selection & a blind focus on cost factors were stated as other reasons. I was wondering if this could be true across the board – large enterprises, mid-market companies and small firms.

What has been your experience or observation? If an IT Outsourcing deal fails, what was the primary reason? And is there something that others can learn to avoid the same reason from occuring again?

In the Sourcingmag.com blogs, I came across a question that was debating upon when to use freelancers to get some software code written versus when to use an outsourcing firm for the same job. It was interesting to read others comment on the question (so did I), so I decided to post my suggestions here.

But as I was writing this post… literally… I noticed that Steve Mezak of Accelerance had posted a response to the discussion forum. And coincidence… he had a post on his blog on the same question, which was pretty much what I wanted to say, but articulated in a way that reflected Steve’s experience.

Find it here