The meadows of outsourcing appear green from a distance. However, pretty often, global businesses incur hefty losses and penalties and encounter general dissatisfaction with their outsourcing adventures. That’s not because of any inherent flaw in the model, but because of their own mistakes. This guide helps you identify these mistakes so that you can steer clear of the pitfalls of outsourcing.
Viewing outsourcing as a pure cost reduction game
Cost reduction, undoubtedly, was the single biggest advantage proffered by outsourcing deals when the concept was in its infancy. Today, it can be lethal for global businesses to simply sign contracts with vendors bidding at the lowest price.
Is your business the cheapest provider in its market? Probably not. Then why look for the cheapest outsourcing partner? Instead, evaluate vendors based on qualitative factors such as their capabilities in latest technologies, innovation capabilities, experience in your business’ domains, and customer service provided.
Slowly but surely, IT outsourcing will add on to your cost savings via:
- Reduction of the need to hire in-house expensive IT staff.
- Automation of laborious and time-consuming manual tasks.
- Freeing up an expensive executive time to focus on more value-adding tasks.
Remember — solely focusing on the cost elements is almost certain to cost you big in the long term.
Damage to ‘industrial commons’
Do you understand “industrial commons”? Well, it’s a loose term used to describe the complex capabilities of a business’ supplier network, workforce, and education and research infrastructure, related to a technology era. Goes without saying, the health of industrial commons is what businesses keep on building upon, to always stay ahead and relevant.
However, Harvard Business School research suggests that industrial commons can be severely damaged for companies that become overreliant on outsourcing. Consider how Kodak and several other U.S.-based consumer electronics companies offshored most of their product manufacturing and development offshore. The result — industrial commons for consumer electronics were irreparably damaged, eventually leading to the demise of giants like Kodak.
The solution — outsourcing of product design and innovation, though practical, must be done only after your organization has implemented strong channels of retaining the learning, experience, and capability, to maintain industrial commons.
Switching service providers just because you can
We mentioned the flexibility of IT outsourcing contracts of these times. That’s a double-edged sword. Whereas it helps global organizations avoid vendor lock-in, it also means that vendors are never fully invested in the contract, and this could impact the service quality you receive.
To manage the anathema of vendor lock-in, organizations do two things:
- They make contract timelines short.
- They engage multiple vendors at the same time.
This alone is not the complete solution. A vital missing link is the organization’s internal capabilities of vendor management, identifying core issues within their own processes, and fixing them.
The result — companies often end up blaming vendors, switching from one to another, and getting stuck in the loop.
Buying that shiny new toy
This is the age of digital hype. Expect vendors to repackage routine technology and present it as the next best thing. Expect vendors to say “yes” when they don’t know the ABCs of a genuinely revolutionary new technology. Expect vendors to always show the shiniest, newest, and most expensive tech toy.
Should you buy it? Well, you can, but not because of the vendor’s enthusiasm. Rampant new tech purchases rarely ever deliver concrete results. Instead, leaders need to decide the top business problems they’re trying to solve (which could be as mundane as “move from Excel to ERP” for your business, or as novel as “get chatbots, and transform customer support into business development”).
Once your goals are frozen, you then conduct due diligence, find out potential technologies, and then “tell” vendors what you want, rather than let them dictate terms.
Outsourcing for the short term
Experts in the IT outsourcing vertical often go as far as saying “there’s no such thing as short-term outsourcing.” Unless you have a super-strong business case that justifies a short-term (less than a year) IT outsourcing project, chances are you’d leave with a bad taste in your mouth.
Here are some reasons why IT outsourcing projects are best managed with the long-term in mind.
- It’s only when a vendor sees the potential of continuous revenue that it will assume the position of a strategic business partner, instead of a ticket solver.
- Long-term perspective will get you the best possible per-year contract rate because promised cash flow means a lot to IT vendors.
- With the long-term approach, you can expect vendors to truly own projects, create knowledge databases, known error databases, and process documents, which benefit the entire IT department.
Always thinking ‘fixed-price bidding’
Though this model promises the best deals for businesses looking to outsource their IT offshore, it could bite you in the back if you overdo it. If the projects are long-term in their requirements, a fixed-price bidding approach could land you in a situation of serious constraints, under which the vendor will not be able to deliver the service under the expected service level agreement.
Instead, be open to the various cost models proposed by the vendor, and then insist upon deep and insightful explanations of the bases of the models. Based on the insights you draw, make your decision.
Is it all that risky?
Make no mistake, outsourcing has been one of the biggest enablers of modern businesses. Compared to what the industry looked like three decades back, modern outsourcing is much more mature and balanced. A lot has improved over time. For starters, outsourcing contracts are very flexible, which allows buyers to negotiate and get great deals. Strategic elements of IT are kept close to home, whereas anything that can be done cheaper and better elsewhere is outsourced. The art of vendor management has expanded, and IT managers are now more capable than ever to control and ensure great performance from outsourcing partners. Know how to avoid mistakes, and you’d do alright.
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