Did you outsource a sensitive part of your business?

Is it your IT landscape strategical or a commodity? What about part of this very same landscape?

      This is a very specific article about IT Outsourcing/IT Services. I am starting with a brief overview then move towards the discussion of differentiating IT between commodity to a strategical asset. I am not talking about advantages or disadvantages but something more specific. Please have in mind that this article is originally focused on Brazilian Market thus takes into consideration the local behavior. Of course, it could apply to other countries as well.

           According to surveyed companies by the GSA, their report shows that 70% of companies are going to outsource more in the upcoming years. On the other side, 84% of service providers expect the outsourcing industry to grow. According to an analysis from KPGM, In 2017, 727 ITO contracts worth USD 137.2 billion were signed worldwide. 

2017 ITO market: USD 137.7 Billion

      It has been widely publicized throughout the media that Brazil has had 53 fusion and acquisitions in January 2019. This number is 13% higher than last year. Fusion and acquisitions mean more services, software development, and new support strategies. The corporate culture of one company will not fit into another. The result of this collision will have an impact on costs and business operations.

           Moreover, fusions & acquisitions is a trend that has been confirmed across the last decade. It is a hard impact on an increasing number of companies. Larger companies will require more specialized IT services the resource scarcity and other well-known issues leads to IT outsourcing.

           The transition into a full outsourced operation usually is a bumpy road. For the most common issues, there is a change in the culture, SLA reviews, adjust the correct accountability (RACI), contracts and penalties to set. It is hard but there is no way around. On the intangible side of things, there is a fact that from outside the company ranks, there is no such thing as a personal touch to push some issues. Everything is compartmented into a way that slows the feedback or that takes time to detects urgency. While the maturity curve adjusts along the months, the corporate culture and user experience start to settle down into a new model. Make no mistake. Outsourcing will have a big impact on the culture. You may ask anyone that has experienced the transition into an outsourced model. 

When talking about IT Outsourcing, I am talking about the following categories:

• IT Infrastructure (Cloud/Server/Network/Security/Desktop/email)
• Solution development (Application/Software/Database/Web/Mobile)
• Software Maintenance
• IT Support
• Telecommunications

           Within the subject the location of the support if offshore or nearshore or local or homeshore/onshore is just a consequence then I will not discuss here.

           Finally, we have arrived at the subject of this article. Due to recent financial setbacks, many companies are more focused on costs. Everything that is tangible is a target and sometimes they miss or underestimate the intangible aspects of the decision.

           Through the combined experience providing services in Europe and working for a large local consultancy, I have had an opportunity to see many strategies and the disadvantages of each. I saw Onshore, offshore or local handled operations. I did discuss this subject with IT Managers, Business areas and Procurement departments. Of course, the local culture plays an important role in this scenario and because I am focusing in Brazil, I will use this main culture to support my analysis.

           Often the common approach is that IT is a commodity and the service provider must provide the resource needed by the company and the competition is good because will drive the price down. This is a sophist argument. Looks like real but it is not.

What if I sell to you a Ferrari by the price of a bicycle?

           This is about understanding if the required service is it a commodity or is it strategical to the business. This is a hard call because many will say that it is strategical but also a commodity. 

      In order to help to differentiate, I will run across one specific scenario. When you do have a fine-tuned operations with several layers of automation allowing your ERP to support a high volume of goods being delivered to the final customers then you have a great deal of strategy on it.

           Stakes are not about the software knowledge but how entangled the process exists with the solution in place. Knowing the process, its variations and previously applied fixes gives an edge for supporting any issue or legal change that may appear. If you do replace the outsourced team that holds this knowledge then you start to lose competitiveness and bring complications to the process.

           There are several ways to tackle the issue and none is easy. Always pros and cons will present then the organization need to decide how to handle it. For example, one could suggest that a local team is always occupied helping business to thrive then cannot teach or control every outsourced team. Splitting a team between operations and projects could suffice but then headcount would have an impact. Again, it is a matter of strategy.

The Key to identify the hotspots is always having an eye on local needs

           This is what a partnership is about. No doubt, that having an alternative solution to the partnership to keep prices in line also would help. The company needs Less focus on driving cost reductions and create a well-tuned partnership with the company. The software/service provider will be more process and people driven and less price-oriented. Specific SLA’s would help to keep a healthy relationship.

           I will now get on a deeper level of detail on the key aspects of vendor management.

Pricing vs cost

           Once, while in Egypt, Luxor, on a 40o C afternoon, I went into a bar and asked for a Coke. I did need to bargain for the Coke for something about 10 minutes. Then, 30 minutes later I went into the same bar and another 10 minutes to get the coke for the same price. A similar thing happens in Brazil. It is a local culture to negotiate. The commercial area puts a price because will need to negotiate with IT then with procurement this local culture pose a risk because many procurement areas are constantly fighting the vendors towards the lowest price. It is a competition and people are proud of getting the lowest price. 

      One way to avoid that is through the average price of the competition. For those cases, still remaining hidden issues: what if all other vendors did overlook or missed in purpose a key feature only to get the lowest price and win the bet. Later a contract amendment will put $$$ and additional time to get the full picture. Someone from procurement may be a specialist in IT pretty much like we have for those who purchase raw material but IT today is a lot diverse than it was. I have experienced this situation before. More than once I did point out gaps that could require more effort and the customer did run another round with this information in evidence.

           Bottom line is to try to get the right deal for the right price and not the lowest price.

           Every company needs to be careful about that. Sometimes the lowest price means less qualified resources. The service provided has a payroll that needs to fit into their costs to allow the revenue. Putting to much pressure in business could generate issues to the operation.

Skill shortage

           Everyone that works with very specific solutions knows how hard it is to find the right candidate to the company. It is well known that globally, we are facing issues because there is a global IT skills shortage. Same issues that your company face, the service provider will face as well. The companies are bounded by contract to provide the service but sometimes it will take a while to find the right professional. 

      This is not a situation of negotiation and contract. Whenever possible, the company need to understand and help the vendor to sort out the issue. Flexibility is the key here. One strategy is having the right policy to allow onshore (working remote) support. There are other strategies to put in place that could help. Once again, very specific SLA’s in place or a procedure to identify those entitled to the benefits is the key to success.

           No matter your contract, one employee working in a nightmarish scenario will leave and because we are talking about strategical hotspots in your IT Ecosystem, we need to try to avoid that. One I have provided services in a company that had no air conditioning. The temperature within the room reached 40o C. Within a world where there is a skill shortage, this is a serious gamble that any company should not try.

Knowledge of the business

           Any company has its own degree of automation. There are very specific operations or technical particularities or delay in the internal process that makes all the difference in any project.

           I will run through three examples in which the knowledge of the business/company impacts in the delivery. 

      One customer may have a particular set of sales that will have further impact in fiscal reports or a standard field in use for another purpose would disrupt business.

           You may have a company I that the firewall rules could pose a risk to the project timeline because any change would require an extensive test across all applications in place.

           A for the technical constraint, there are companies in which the integration process requires a very specific set of middleware in which is hard to track down who holds the information.

           Any of the scenarios above could have an impact, then for those that are part of the strategical piece of the ITO, they would not suffer and the risk would be minimized.

Security

           A partnership does not mean monogamy. A healthy relationship should shift away from a single IT outsourcing provider. Having a second partner in place would help to balance the operations. Nowadays many large companies are not able to ensure that all the technical skills needed to run business operations are available. It is hard to sufficiently supply the organization’s needs with the help of the in-house expertise only. Thus, businesses will be likely to outsource. The same issue that one organization may face could also help to your preferred supplier. You need to have options thus, another partner with deep expertise in specific areas would help.

           In the near past, companies use to create contracts with large service providers but again, money is not everything. Having the right professional means the required knowledge to support the operations. Within the past years, many companies started to get very specific in their niches. This is not only about the size of the service provider but the required expertize. It takes a while to prepare and expose a professional to enough experience that will differentiate him from all others. Smaller companies also allow flexible salaries that could reduce turnover.

           Hiring someone in the market or having him prepared and supported by a bunch of well-versed seniors sounds a safer approach to me.

Conclusion

           Culturally business use to differentiate between IT and Process but the recent development of the technology brought a new scenario in which the operations cannot differentiate were ends the process and where it starts the IT. Recently I was speaking with a tax manager and he, around his forties, said that this year he needed to learn how to operate the system.

           Besides the daily operation, new strategies also are a critical aspect of the operation. A restriction in IT could be a blocker for an operation designed by business. Au Contraire of the common knowledge, not everything can be sorted with money and time. The Ford Company did sort this out having the IT integrated with the business all the time. Through the shoulder-to-shoulder approach, they have had minimized numerous risks and increased response time for the projects.

           I have worked in a large telecom startup. From 0 to 1200 employees within a timeframe of one year. Physical presence in several cities and several hundreds of customers every month. A service provider gave the SAP training but issues in operation remained high and the call center was losing too much time in giving the proper support. We did need to train them again using local knowledge and this initiative reduced the support calls by 70%. By that time there was no vendor with local knowledge then business needed to put a task force to sort this out. The solution was training with a focus on the process rather than software knowledge.

           The key to address the issue is to differentiate between commodity and strategical areas. This differential could be SAP services, Extranet maintenance or your intranet. Whatsoever is the choice, I can assure you that working with an integrated team usually generates better response both with business and quality.