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Extreme Outsourcing

Extreme Outsourcing

The days of lump-sum outsourcing deals and blunt offshore labour arbitrage are gone. The future is about disaggregating IT processes — and then figuring who is best equipped to handle them and where they are located. Here’s how to do it right

Stop Outsourcing Problems

When a company first engages an outsourcer with offshoring capabilities, it is usually thinking one thing: reduce costs. True, the labour arbitrage can be staggering; an experienced full-time engineer in India or Eastern Europe costs about $US30,000 a year, and only half that in China, while programmers can cost $100,000+ locally. Not surprisingly, many, if not most, companies end up saving money — at least up front — when they outsource offshore. Consequently, according to a recent McKinsey report, a large majority of outsourcing customers say that on the whole they are very satisfied with their offshore outsourcing initiatives.

But the initial cost savings often mask long-term problems. Most companies tend to outsource processes without examining their quality and efficiency. They generally hope — or contractually demand — that the outsourcer fix things for them. Indeed, after the first year of an engagement, McKinsey found, companies begin to focus less on cost savings and more on flexibility and agility. That takes time, money and management attention — and may blow away the initial cost savings. "If you are outsourcing a problem, it will still be a problem," says Bill Homa, CIO of the supermarket chain Hannaford Bros.

Breaking down IT processes into discrete components and analyzing which ones you can or should do and which ones a partner with subject matter expertise should do lets CIOs avoid merely shifting bad processes to an external provider. "If the CIO paints all of his IT areas with the same outsourcing brush, he is going to fail," says Joseph Rottman, assistant professor of IS at the University of Missouri, St Louis.

Break Down the Work

Boehme knows how to break things up and parse the work sensibly. For example, at a previous job he had to build an order configuration management system. He had his own people do the requirements gathering since they understood the business and worked closely with the users. The design was done with a mixture of in-house staff and contractors. Three groups — one in India, a team of onsite contractors, and students at a local university — did the actual coding. Yet another group did the initial testing before his team did the final regression and load testing and finished the deployment. "It made sense to do it this way since we didn't have all the skills in-house and we couldn't move people off other projects," Boehme says. But he found that breaking down the work like this allowed the project to be finished 25 percent faster and 20 percent cheaper than if he had done it all in-house or outsourced it entirely. Plus, his team was able to keep architectural control and retain the intellectual capital the project created.

By understanding exactly what a process or task requires, CIOs can determine if they have the skills and the resources internally to do the project and if doing so would give their companies a competitive advantage. If not, an outsourcer can sometimes take better advantage of geographic location and a deeper bench of special skills to do the job. It's a low-cost way to get the skills you need, in the place you need them, for as long as you need them. "If I have 20 testing resources working on PeopleSoft, I don't have the volume" to get economies of scale and to quickly react to business changes, says Boehme. But outsourcers do. "And at the same time, because of the size of their organizations they have the ability to offer advanced training programs to those people as well," he says.

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