Wednesday, January 28, 2009

Outsourcing Initiatives for 2009

It is not a stretch to presume most people were happy to see 2008 come to an end, yet most analysts and experts predict 2009 is going to be worse. As we stumble into the New Year, executives are challenged with the cyclical routines of planning, budgeting, forecasting, and so forth. It is hard enough to do these tasks in normal times, but it becomes a nightmare in the uncertain economic environment we live in now, but outsourcing can help.

Given this uncertainty and chaos, it is a good time to look at outsourcing as a means to save money, propel new business ventures, and improve efficiencies. It is also a good time for companies to review, rationalize, and evolve their outsourcing programs. In light of this, the top three outsourcing initiatives for 2009 include:

1. Reviewing Deal Structures

Most current outsourcing deals and models are outdated and ineffective because they are people-based and not demand-based. Companies have a need for resources to do the work that is required; they negotiate a rate with a vendor; and determine contract durations. The contracts primarily follow a simple model: People x Rates x Duration.

It is easy to understand why a people-based model is being used today, since outsourcing (especially Indian outsourcing) grew out of the Y2K era. Companies first engaged outsourcing companies in staff augmentation models to address their Y2K needs, and hence, all subsequent outsourcing models have been people-based. While outsourcing companies have grown in leaps-and-bounds over the past three to five years in terms of their capabilities, there has been little evolution in deal structures.

People-based outsourcing contracts are the equivalent of paying rent. The rent is due each month regardless of use. In a "rental agreement" there is no mechanism or incentive to drive productivity improvements, efficiencies, higher-value-add-services, faster time-to-market, and deeper cost cutting efforts.

Demand-based contracts and models are revolutionary and will drive unbelievable results if properly implemented, executed, and governed.

2. Portfolio Rationalization

Portfolio rationalization has been one of the biggest trends in the application outsourcing market over the past two to three years. The industry has matured to a point where companies can now review their portfolio of outsourcing partners and set themselves up with better mixes of companies, countries and models. This is not an easy task, since every company is different and there is no cookie-cutter approach to finding the right mix of outsourcing partners.

Most companies delved into offshoring by tying up with two or three of the big names out of India, but there are few differentiators between these vendors and hence portfolio rationalization was borne. The vendor and country mix depends greatly on the size of the company seeking services, but in most cases, a multi-vendor mix is appropriate.

3. Cost-Cutting

The combination of hard economic times and the maturity of the outsourcing industry will force and enable companies to find new ways of cost-cutting. It is important to realize that there is no silver bullet on cost-cutting and it is equally important to understand that the biggest levers for cost-cutting are not the rates themselves.

How can companies cut costs with their outsourcing initiatives?

* Offshore to Onsite Ratios—this is by far the biggest lever in reducing the total cost of ownership of an application or suite of applications. The more roles that can be moved offshore, the more money can be saved. The industry benchmark is 80:20 (80 percent of resources offshore and 20 percent onsite), but most companies flounder with "fat" models and have too many people onsite. With mature processes and governance, there is no reason 90:10 cannot be the new benchmark. Plus, outsourcing companies make more money on offshore resources, so they will be eager to help companies reduce costs with better offshore-to-onsite ratios.
* Time-to-Market—if products and applications can be delivered faster, companies will reap the benefits sooner. To do this, IT organizations must work with their outsourcing partners on better ways to execute projects, leverage reusable components and foster knowledge-sharing.
* Quality Improvements—if products and applications can be delivered with fewer bugs and defects there will be less time and money spent on re-works. IT organizations must leverage the knowledge, experience, tools and processes of outsourcing companies.
* Productivity Improvements—productivity is married-at-the-hip to the outsourcing model being deployed between the company and the vendor. If companies embrace the demand-based models depicted earlier, real productivity gains will follow because outsourcing companies will be forced to increase productivity to control costs.
* Rates—with the rupee depreciating against the dollar and the cost-escalation coming under control in India, rates will become more competitive.