Despite some negative vibes about the death of outsourcing, it seems to be still rolling. The numbers may show a slight stagnation in the value of the global market for outsourced services that remains the same $88.9 billion as three years ago, but the very model of contracted work has been proving its viability for years and isn’t going anywhere.
It’s also true that, of all outsourced services, somehow the term stuck to custom software development in particular. And the share of information technology outsourcing (ITO) is impressive. For example, in Raconteur’s special report The Future of Outsourcing, Sharon Thiruchelvam writes that in the UK, ITO comprises 73% of the outsourcing industry, with this volume doubling every year.
And ITO is truly ubiquitous. Just looking at the map of industries using ITO services makes it clear that almost every single domain sources its products or business process management aspects externally.
With all these facts on hand, we can be sure of the model’s vitality. But it’s even more interesting to look at the reasons behind this vitality to understand why companies outsource at all, what common fears and challenges are associated with outsourcing, and how to address outsourcing risks.
Understanding why certain companies opt for outsourcing is fundamental for getting to the core of contemporary business models.
This trend toward opening up companies’ boundaries to external workers can be traced in the organizational theory of the last few decades. The topic of temporary teams versus permanent organizations has been occupying economy philosophers such as Grabher, Leadbeater, and Handy, among others. They argue that as we enter the post-Fordist era of economy, traditional firms start shifting to outsourcing models, many of which consist of virtual networks of so-called “portfolio workers.”
This is how the project-based collaboration is no longer surprising for today’s generation of entrepreneurs. Getting together to reach a particular goal with the optimal set of required competencies (that come from outside the core company) becomes the way to reach benefits that are otherwise unattainable.
With volatile markets, ever-changing customer demands, and emerging technologies, companies are forced to become flexible for the sake of their competitiveness. Other reasons to go for outsourcing include cost optimization, reduced HR management efforts, and the opportunity to tap into potentially unlimited skillsets. This equally entices both mature corporations and startups that strive for quicker time to market not hindered by the inability to attract sought-out talents.
Deloitte reinforces this positive outlook on outsourcing in its latest Global Outsourcing Survey, where it provides at least eight motivations to outsource based on the surveyed executives’ responses.
As it happens, though, there’s the flipside to everything. For each of the benefits, companies have to deal with challenges of outsourcing, which can come from both the outsourcing vendor and the customer. Although they are often perceived as risks, this article shows further that they can be effectively battled with a degree of a healthy collaborative ethos.
In the time when digital transformation becomes a matter of survival and a must for businesses to maintain their relevance on the market, ITO vendor relationships turn into strategic enablers. It’s even more harmful then to partner with someone who can’t deliver on this promise.
The same Deloitte survey cited above provides an interesting insight into the areas of improvements as identified by outsourcing customers. Here, 46% of customers believe that vendors could be more proactive in their service delivery, while 33% think that vendors don’t provide enough innovation.
Such stats help to look behind the scenes and understand how affected a company can be with their choice of a vendor. There are more potential pitfalls beyond reactiveness and a lack of innovative drive, though.
The Global Sourcing Association research shows more areas where the outsourcing experience could be improved by both customers and service providers. However, their opinions differ, showing that the pitfalls of outsourcing vary depending on which side you take.
There are numerous pain points, but where do they come from? To get deeper into the subject, it’s worth looking at the risks of outsourcing brought about by its very nature, and the ways to address them most constructively.
The remote nature of all outsourcing projects may be viewed as the number-one challenge, with typically little control over the process of project delivery happening on the vendor’s site.
Yes, outsourcing teams are almost always in another location, probably even on another continent, but there are always ways to solve this issue.
Business trips should be frequent, especially at the beginning of the project when trust is built and requirements are gathered. Face-to-face communication is a must for gaining trust, so that customer could put up with the necessity to let go of some control and delegate certain responsibilities to the vendor’s team. It is crucial to make sure that the customer knows who the people are and sees them as equal partners in the project.
All in all, providing that 80% of any work can be done remotely, and there are effective technologies on the market to make communication seamless, this challenge becomes quite manageable.
One possible pitfall of outsourcing beyond your company is the lack of domain-specific knowledge within the vendor’s team. Any project success is always determined by how well it fits into the industry where it’s meant to bring value. If the team has no previous experience of similar projects or can’t navigate the industry’s problems and needs easily, the customer will have to allocate extra budget on knowledge transfer and team orientation.
There are two ways to go about this problem, actually. The first one is to hire only those vendors that can showcase their portfolio of projects done for your industry. The second one is to include the discovery phase in the first stage of the software development cycle, so that the team will get on the same page regarding the project requirements and the customer’s expectations.
When working on some plain project, there is a high risk the vendor’s team can get a little bored with the lack of a stimulating challenge. And as we know, projects differ, and not all of them are about developing ground-breaking products.
One of the possible solutions is to introduce a dynamic cooperation culture, where developers themselves have a voice in shaping the product. Another way is for the vendor to keep rotating the staff across teams and locations in between projects, and keep it 70% work and 30% fun.
It doesn’t happen often, but sometimes customers “disappear” right after the start of the project, thinking their job is done until it is time to reap the end result. When emails are ignored for a few days, it can be a solid reason to stop the project. If the IT team doesn’t get regular responses to their questions or comments, chances are the end product will not be what the customer initially envisioned.
Both sides need to remember that constant monitoring and feedback are the key prerequisites for success. After all, it’s a two-way street.
On the customer’s part, being “too nice” and automatically approving each stage of the development can seriously hurt the project. The outsourcing team needs criticism like they need air; it is the very foundation of their decision-making process. Constructive criticism shows that the customer is aware of how the project is going on and is fully emerged into the process. The more detailed the criticism, the better the results.
Looking closer at the risks sketched above makes it clear that they mostly spring from a poor collaboration culture between the customer and the vendor.
In our decades-long practice, we’ve seen the best results from relationships that went beyond pure transactions and grew into true partnerships. This is not always easy, because it requires a cultural shift that emphasizes work towards the same objectives, alignment of responsibilities, and focus on creating value, not outputs.
Shared accountability should be at the core, and only then collaboration becomes healthy and drives successful results. Such accountability should go beyond the basic metrics of time, scope, and budget, including also hard policies on managing risks, such as those related to legislation, security, and confidentiality.
Drilling down to the foundation of any successful ITO project, we shouldn’t forget about effective project management either. Skipping managerial duties on the customer’s part can result in chaos and lack of control. If there is no project manager on the vendor’s side, the customer is likely to get lost in a flood of email from designers, developers, programmers, and testing engineers, and thus risk overlooking critical information.
This is how getting on the same page through efficient project management, sharing accountability for the project outcome, and creating a tight and transparent collaboration environment can help to address the risks of outsourcing.
Yes, outsourcing is risky indeed, but only if you underestimate the importance of fine-tuned project management and communication. So, if problems of outsourcing do exist, they are likely to be caused by the lack of proper project governance and fickle relationships between the customer and the vendor.
Paying attention to the clarity of partnership terms, strengthening project management guidelines, and keeping up genuine communication throughout the project is a way to go for those who want to avoid falling in common traps of mismanaged outsourcing.