Wednesday, April 13, 2011

Outsourcing Is Going To Be Great !


For most of us, the word "outsourcing" has a negative connotation. But this is slowly changing, thanks to a new breed of outsourcers. All parties will benefit from this gradual shift, including people whose jobs will be outsourced.

But let me start at the beginning. Every time I hear people complain about their outsourcers, their frustration seem to stem from the same two causes:

1). We cannot force our outsourcer to improve the service to an acceptable level.

Most outsourcers have successfully managed to avoid specifying measurable targets in their agreements. The targets that customers care most about are typically availability (or uptime) and the time it takes to get incidents resolved. Just read some of your organization's outsourcing agreements. I bet you will not find any concrete numbers for these targets. Even if these service level targets are specified, that does not mean that the outsourcer gets penalized when it is not able to meet them. Some outsourcers have been willing to commit to response targets, but those do not help a customer in any way.

2). We are stuck with our outsourcer.

Outsourcers used to believe that the longer they forced their customers to use their services, the better it was. The simple and transparent way to do this is to specify a minimum term in the outsourcing agreement. But there are many other ways that customers become dependent on their outsourcers. In the old days, for example, it was common for an outsourcer to take over the customer's data center. If a customer did not want to renew the contract, that did not mean they would get their data center back. Another way customers get stuck with an outsourcer is by having applications built that only the outsourcer knows how to maintain. Outsourcers can also make it hard for customers to get their data back. If the customer decides to go somewhere else, it can be time-consuming to get the data out of the outsourcer's application and to convert it into a format that can be loaded into another vendor's application. It could cause several days of downtime.

So, many IT managers have found themselves stuck with an outsourcer that was perceived to deliver unacceptable results. This perception has tarnished the reputation of the outsourcing industry. Why were outsourcers willing to sacrifice their reputation by tying down customers and not taking responsibility for poor performance? Well, there were obviously good reasons. For example, outsourcers often do not get much information about the services they were taking responsibility for, so they are unable to commit to any targets. Also, for an outsourcer to bring a new customer onboard, it normally needs to invest large sums of money into hardware and software licenses. When this investment is depreciated over a longer period of time, they can offer the customer a better price. But it requires the customer to sign up for the same number of years.

But why have organizations been willing to accept the terms of such outsourcing agreements? Simple. Their own IT departments were not giving them a better deal. Many business managers are just as frustrated with their IT department as IT managers are with their outsourcers.

Thank goodness things are changing. More and more IT departments have started to measure the service levels they provide to the business. This sets minimum goals for outsourcers that want to win the organization's business. More importantly, though, new players have started to essentially commoditize infrastructure services like storage, backup, database, server processing and disaster recovery. SaaS service providers are able to leverage these infrastructure services to deliver their software services. The interesting thing here is that these new players offer terms that give customers a lot of flexibility. Some plans even allow customers to cancel the service whenever they feel like it. Better still, they are committing themselves to real service targets. When a target has been violated, they offer 'service credits'. See for example how Amazon's EC2 SLA includes an uptime target of 99.95% and how Google commits to a 99.99% uptime for Google Apps.

In order to compete, traditional outsourcers are under pressure to offer similar terms. Customers are demanding more accountability and more flexibility. This may sound like a bad deal for those traditional outsourcers, but it is not. In fact, this could be the best thing that has ever happened to them. Think about it. If customers feel free to switch whenever they feel like it, they will not sit down and sulk and blame the outsourcer for everything that is wrong in the world. Instead, they will look for alternatives when they believe they do not get the attention they deserve. In many cases they will realize that their current provider is actually giving them reasonable value for money. Even if a customer decides to contract another provider, then at least the idea of outsourcing does not get blamed.

And why would you not outsource as much as you could if IT services were available at competitive prices and you could switch outsourcers like you switch mobile phone providers? Once companies start to feel that they can trust their outsourcers, they will outsource more. The more they can offload the technical complexities of IT to their outsourcers, the more they can focus on their core business. So this is good for both customers as well as their outsourcers.

But what about those poor people who work in the IT department? I am glad you ask. First of all, these are not poor people. Far from it. They have technical skills that are in demand. The world may be going trough a major financial crisis, yet if you work in IT you may not even have noticed. Second, why would an IT specialist want to work for an organization that does not really care about IT? Let's face it; most organizations are not very good at IT. They may be the best at refining oil, manufacturing cars, or delivering financial advice, but IT just is not their primary focus. It would not make business sense. If you are a technical expert, you want to work with, and learn from, the best in your field. You also want to share your experience with others who care about your area of expertise. Working for an outsourcer, where the core business is IT, offers you a real career path. They will invest in tools that will automate much of the mundane aspects of your work and the environments you get to work on are often much larger and more interesting. Granted, the initial offer people get when their role is outsourced may not be as good as the one they got from their former employer, but in the long run most people thrive when they leave the IT department. The ones who do not want to continue their career as a technical expert still have a bright future ahead of themselves managing the relationships (especially the agreements) between customers and outsourcers. This is a growth area, especially within customer organizations (see The Future of the IT Department).

In general, most customers, outsourcers and IT experts can be expected to benefit from this trend. That does not mean that all outsourcers will start to commit to measurable targets and will make it easy for dissatisfied customers to go elsewhere. But they need to realize that, in the long run, they are hurting their business if they don't. This transition will be scary for many well-established outsourcers. Just imagine tracking the actual service levels and openly sharing this information with your customers. But this is what it will take to (re)gain the trust of your customers and to be able to compete with other outsourcers that have made this their key differentiator.