The Real Costs of Outsourcing

Transcription

1 Experience Gap and Resource Shifting Hides Productivity Losses by Scott Noble, Director, Global Sourcing Insights LLC April 14, 2004 Copyright 2004 Global Sourcing Insights LLC All Rights Reserved 1 Stone Ridge Rd, Santa Fe, NM Tel: , Fax:

2 The Real Costs of Outsourcing Experience Gap and Resource Shifting Hides Productivity Losses By Scott Noble, Director, Global Sourcing Insights LLC So, you just met with the representatives of an outsourcing service provider and they have guaranteed you savings of twenty, thirty, maybe forty percent over what you currently spend for IT staff and though this sounds like the answer to your cost-cutting prayers you re a little hesitant to believe it. You should be. Why? Because what appears to be the bottom-line all too often does not take into account many of the real cost factors that can affect your total cost at the organization level. In this article, we will investigate some of these cost factors and the way in which your organization is affected in a typical outsourcing scenario. The Experience Gap First, one of the typical ways that outsourcing firms are able to make their margins while charging you what appears to be less for your IT work is that they generally tend to replace your existing personnel with less-experienced personnel. Through all the bluster and hype about efficiencies that they have because IT is their core or only business, the truth is that most outsourcing service providers will staff your project with personnel who have considerably less experience, in general, and, more specifically, a fraction of the industry expertise of your existing staff. By doing this, they are able to substantially reduce their staff costs. How else could they replace your people with their people, one for one, and still make a thirty-percent margin? By using lesser experienced personnel, they may replace your $70,000 a year senior programmer with a $40,000 a year college new-hire. The difference is made even more dramatic if their college new-hire is offshore. But they told you that the staff offshore would be experienced, right? It is possible that you can enforce a minimum level of experience for certain key positions, but not all years of experience are equal, particularly when it comes to: industry-specific knowledge, generally accepted business practices that can vary substantially among cultures and countries, regulatory environments, and other hard-won expertise that may not be accurately reflected in just the number of years of experience that a person may have in a similar technological environment. Just because someone has 3 years of experience with Java or XML doesn t necessarily mean they know anything about insurance, finance, or whatever industry in which your firm competes, much less how your firm does business and your unique customer and organizational culture. Industry expertise, intimate knowledge of your business and your customers, these things can all directly and very significantly affect the performance of your IT staff. Resource Shifting Hides Productivity Losses This brings us to our next point, that elusive holy grail of cost competitiveness - productivity. Regardless of how well you have defined the work to be performed by an outsourcing provider, it will never accurately reflect the full realm of service provided by Copyright 2004 Global Sourcing Insights LLC 1

3 your internal staff. That air-tight contract and statement of work you have defined may not include a lot of the work that typically is done by your current IT personnel which often goes unrecognized. For instance, many IT people have a depth of knowledge regarding your industry and your internal processes that can be hard to quantify and even harder to replicate. This is by virtue of the fact that IT work often requires them to analyze, and sometimes create, the very processes that are the core of your business. Over the course of years, a typical IT person will come into contact with every department within the organization from plant floor through supply-chain to finance and the executive suite. As the life-blood of an organization, only finance and IT (read: money and information), are required to have a total, systemic view of an organization and all of its internal workings. As executives, we come to depend on the information we receive from these two departments to provide the insight we need to create that systemic view for ourselves. So, what happens when you replace those years of experience, and the insights gained, with lesser experienced personnel? Something has to give, and that something is usually manifest as a greater reliance by the new IT staff on personnel from other departments to do everything from providing information on internal processes to defining the need for, or function of, new systems, applications, and features or functions of applications; all work that had been done within the IT department itself. This can be translated into an invisible cost shift that results in finance or manufacturing or marketing being forced to hire additional personnel to keep up with the demand for knowledge and expertise from the now less-effective IT department. Did your company save anything if they replaced an $80,000 per year programmer with a $40,000 a year programmer and then had to hire a $50,000 a year Business Analyst in another department? The answer, of course, is no at the organization level, you have spent an additional $10,000 a year. But that is not how the outsourcing initiative is typically measured. Most organizations will look at their IT costs in isolation, blissfully unaware of the net economic affect on their business, and proudly proclaim to the shareholders and the press that they have saved big dollars on IT by outsourcing. Of course, the IT service providers are more than willing to help you believe this. The bottom line with regard to productivity is this the outsourcing staff will not have the total capability of your existing staff, and if they did they would not be able to offer substantial cost savings. To raise overall productivity, you must carefully select who does what in order to maximize the value to the organization. Here I am reminded of a classic case study in productivity. The organization in question was an automotive repair shop that had many customers but not much in profits, in other words they were very busy but not very productive. Investigation of their operations revealed that they were assigning work as it came through the door to the next available person. This resulted in using highly trained and skilled mechanics to do work like oil changes and tire rotations, while lesser skilled personnel struggled with complex problems. By evaluating the work to be done and assigning that work to the appropriate personnel, the shop was able to substantially improve productivity, and gain profitability. In a similar way, your IT organization must evaluate the work to be done and be sure to allocate that work in a way that maximizes your overall IT capability. Real Benefits By now you are probably beginning to seriously question the real benefits of outsourcing, and asking these questions is a big step in the right direction. There are huge potential Copyright 2004 Global Sourcing Insights LLC 2

4 benefits to be gained from outsourcing, it is simply that outsourcing is not a panacea or a silver bullet, and must be approached with a high-degree of intelligence and some skepticism in order to obtain those benefits. To truly reap the benefits of outsourcing you must: Define the work analyze the work being performed in your IT department so that you can fully understand the depth and breadth of your existing IT capability and so that you can determine what must be done in-house and what can be efficiently and effectively outsourced. Understand the value-adds What would happen if your IT organization were suddenly replaced with machines, which performed to the letter only that which was in the job-description of the people they replaced? What would be lost? What would other organizational entities and personnel within your firm have to do to reclaim that lost value? Get the big-picture look at the total system of your firm and how IT currently contributes to the overall ability of the organization to produce products or services for your customers. Be selective understand that there are very real opportunities to improve your IT effectiveness through outsourcing but that these opportunities are discrete and typically focused on very specific activities and types of work. Once you have done these things, you will begin to understand the way in which selectively outsourcing specific, well-defined activities can contribute to your total IT capability and, thereby, improve effectiveness and reduce costs. Copyright 2004 Global Sourcing Insights LLC 3

5 About the Author Scott Noble has over 20 years information technology experience including over 15 years of outsourcing and 10 years offshore outsourcing experience. Scott has held a variety of leadership and consulting positions with technology firms Syntel, EDS (Electronic Data Systems), and Texas Instruments. Scott spent over eight years with EDS, the company that pioneered Information Technology outsourcing and led their Plano-based software estimating center. In the last 10 years, Scott has worked with many Fortune 500 and Global 2000 firms developing and implementing the processes which have come to define how global outsourcing is performed. During this time, Scott saw the need to integrate enhanced knowledge regarding people, cultures, political environments and tax and regulatory regimes that affect global business and offshore outsourcing. Scott was accepted into an Executive program in International Business at the University of Texas and holds a Master s degree in this field of study. About Global Sourcing Insights LLC Global Sourcing Insights (GSI) advises companies in using offshore outsourcing as a part of their business strategy. GSI has in-depth expertise in offshore outsourcing and has assisted many Fortune 500 companies in analyzing the feasibility of outsourcing their IT application portfolio. GSI becomes involved with companies that are contemplating an outsourcing initiative for maintenance and development of their information technology systems. Their Application Portfolio Feasibility Assessment is a quantitative process to identify those applications that would benefit from offshore outsourcing. They also provide advice on outsourcing best practices to mitigate business and political risks. For more information, please visit Copyright 2004 Global Sourcing Insights LLC 4