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November 25, 2004
The Outsourcing Business - Is It Right For You?
by Sridhar Ramanathan
If you run a channel business, you're probably asking yourself, "should we get into the outsourcing business?" Gartner Group estimates that midsize business spending on IT management services will exceed $15 billion by 2006. Some of the hottest segments include: call center operations, software development and QA, manufacturing, product design, and telesales. If you're responsible for top line growth, you can't afford not to take a hard look.
As the former Marketing exec for HP's Outsourcing Services business unit, I have a few lessons to pass on to you from my tenure. The first point is to understand why companies outsource. The principal drivers for the mid-market are to: focus on core competency, gain time-to-market by buying rather than building wherever possible, to reduce cost, and to increase operational efficiency. Chances are that your own customers are asking you for an outsourced option. Some of you are already down this path. But are you chasing a deal or entering a business? This article offers some criteria for proactively assessing the business opportunity.
Let's also distinguish outsourcing from support services. Outsourcing is typically a long term business relationship with a company that handles a business process or function. Outsourcers provide ongoing operational responsibility not just the design/build phase arising from a software purchase. Outsourcing is the most intimate business relationship imaginable. There is a true sense of shared success and failure. Here's a quick overview of outsourcing pros and cons from both sides of the relationship.
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So if you're considering offering an outsourced option, use these four criteria to see if it makes good business sense for you:
1. Can we make money? Leading IT outsourcers make over 40% gross margin on multi-year contracts. Will you have the operational efficiencies, cost advantages, process maturity, and scale to make it in the business? Remember, the key to making money in outsourcing is driving down costs (labor, capital, software, etc.) while delivering flawlessly against service levels so you can collect annuity revenue.
2. Can we deliver? Outsourcing is a very different business model than traditional VAR, SI and reseller models which emphasize high volume transactions over deep customer relationships. Remember, you're actually running part of your customer's business on a daily basis. Customers will escalate to the CEO in a nano-second if something breaks. Think carefully about how well your team can deliver against tightly specified service level agreements. And do you have enough instrumentation to proactively avoid disasters?
3. Is the risk/reward ratio good enough? Most channel companies are allured by big deals with juicy contract values. Outsourcing relationships are all about managing risk. Industry leaders are artful at quantifying risk and pricing it into the contract directly. For example, if the customer demands five nine's availability and two hour response times globally, are you getting paid enough to deliver that level of service? Has your legal team reviewed the liabilities? Do you have mutual responsibilities built into the contract to spell out who's accountable for what?
4. Does it fit with our strategy? Becoming an outsourcer puts big demands on your company's execution. You will likely need a separate organization including sales specialists, pursuit teams, delivery/operations, finance, contracts, and HR. Again, are you willing to institute the discipline, rigorous processes, and organizational metrics to reward the right behaviors? Let's also not forget the big cultural shift from maximizing volume with many customers to maximizing value with a few.
Outsourcing can be a very rewarding business strategy for your company when it's done for the right reasons and with the right team to execute. I promise you that you will be a trusted partner to your customers with ensuing limitless growth possibilities. It's no wonder that everyone is jumping on the bandwagon. But how many will stay on the wagon long term?
Posted November 25, 2004 | Permalink
Posted to Technology