Outsourcing is back in style

Cycles are a given in the business world. It seems to be just a matter of time for a great idea to become stale and unfashionable, and then resurface at a later time as something new and improved. Such is the case of enterprise outsourcing, the practice of hiring an outside source to transfer components or large segments of an organization’s internal IT structure, staff, processes and applications.

Outsourcing came into vogue as long ago as in the 1930s, when tasks such as payroll processing were given over to companies that had fancy adding-machine kind of equipment. Since then outsourcing has been in and out of fashion, but over the last few years has stabilized in the market, and is seen by Aberdeen Group’s research director for group IT services, Stephen Lane, as a continuing growth area – particularly in light of the recent economic slowdown.

“At the end of the day, it’s a fundamental value proposition,” Lane said from Boston. “In bad economic times outsourcing seems to spike because of the cost value proposition. It’s better, faster and cheaper.”

If better, faster and cheaper are the three primary reasons for the success of outsourcing, common sense is the driver of the success, according to Marilyn Beaton, IBM Canada Ltd.’s business development executive for application service providers and incubators at the NetGeneration Business Unit in Toronto.

“It’s a core competency issue,” Beaton said. “It’s a leverage issue that says there are specialists who are good at doing this, so why would I do it? And if I can lower my costs of this solution by sharing it with other people – the infrastructure and all that – why wouldn’t I do it? It’s just logical.”

In addition to these reasons, Andrew Schroepfer, an analyst for Tier 1 Research in Plymouth, Minn., cited a very practical one for outsourcing’s boom in the early ’00s.

“Technology has been advancing so fast,” he said. “It is hard for any enterprise alone to keep up with technology, hire people with expertise, and then stay on top of it once they start to use it. Outsourcers do it for several companies, and can leverage their experience, skills and technology.”

Call it the bandwagon effect, but for whatever reason, it is clear that outsourcing is back in style and that it’s going to be around for a while. Bob Desmarais, vice-president of business engineering at CGI in Toronto, attributes this to the fact that reasons such as those stated above have overshadowed the concept that ultimate control over every piece of a business is best.

“Outsourcing is no longer the taboo that it was from the ’70s to the ’90s,” Desmarais said, stressing that it’s no longer just the big companies that are embracing the trend. “In today’s economy, most companies, if given the opportunity, will investigate outsourcing. Not all understand it, but there are no boundaries or walls around what kind of company will outsource anymore.”

Needs have changed

Since the early days of outsourcing, much has changed in the world of business and the world of technology. Many companies continue to outsource their payroll, but the business of outsourcing has become much more complex. Application service providers (ASPs), managed service providers (MSPs), network service providers (NSPs) and xSPs (a generic term for service providers on the Internet), have all been added to the vocabulary lists of IT decision makers, who are realizing that moving certain applications outside of the company will save time, money and resources. More importantly, outsourcing necessary but peripheral applications allows for companies to focus exclusively on their business without losing integrity in these areas.

“Outsourcing is a huge and diverse market, that involves everything from software development to IT infrastructure,” Lane said. “Whether it’s managing an application, or developing an application or running the servers on which it sits, if this is not your core business, it’s an expense that’s detracting from your core business. If someone comes along and says that they can do it better, faster, and cheaper, you’re liable to listen.

“These days, bandwidth is cheaper than people, so you can do things remotely,” Lane continued. “Before you had to put people on site in order to do things like manage desktops. Now, economies of scale start working for you. The explosion of the use of technology, the increase of complexity, the shortage of resources, worries about cost and time to market – all of these things enter into the picture. If you can’t do it yourself, or it’s too expensive, outsourcing is a simple answer.”

For Brian Phelps, president and CEO of Vested Development Inc. in Burlington, Mass., the biggest change in the outsourcing market has occurred post-Y2K.

“Most of the change we’ve seen has been in the last 12 months,” Phelps said. “Twelve months ago, sales calls focused on questions around experience and availability. People wanted things started today and done tomorrow. Twelve months ago, cost was an afterthought. It was all about speed. Over the last 12 months, this is no longer true. It’s more a question of value.

“Historically, Fortune 500 firms were the ones trying to focus on core competencies,” he continued. “Now an increasing number of companies of all different types are considering outsourcing, [including] transportation and utility companies. Software is not their business, but a necessary component of running their business.”

Peter Valters, the Ottawa-based director of outsourcing for xwave, cited Air Canada as a good example of a company turning to outsourcing in order to maintain focus on its primary business. Valters explained that by allowing an IT specialist firm to focus on its IT side of the business, Air Canada is able to focus on moving people, its core competency.

sharing makes sense

Like every new parent who believes that every need and success of his or her child is unique and amazing, decision makers in companies are often sceptical about using standardized applications for their individual needs. This concern is unwarranted, according to Beaton, who pointed out that sharing materials and suppliers has been a standard in other industries for years.

“Companies today buy tires from a tire manufacturer who makes tires for all of their competition, and that’s not a problem,” Beaton said. “So why would it be any different in providing some other thing I need for my business? It’s just new. Once it gets to be more ingrained in what companies do, the bigger it’s going to get. There will be a day when it’s so common that you won’t even be able to figure out where anything’s running, who’s running it or where it comes from. It will be such a blur back there.

“It’s like the analogy of buying a GM car or a Ford car or a Mitsubishi,” she continued. “Do you think that Ford or GM or Mitsubishi makes all of those things inside of their cars? They don’t. All of those tools you use in business are going to come from many, many places just like anything else does.”

It is this area of standardized applications that Thanos Moschopoulos, Coradiant Inc.’s Montreal-based CFO, believes is ripe for outsourcing.

“The more custom your needs are, the harder it is to outsource them,” Moschopolous said. “It’s when you have a standardized set of needs, when you need the same stuff that a lot of other people need, it makes sense for a third party to come along, because you have inherent economies of scale and economies of skill. The facts are that we can hire and retain top quality neo-network engineers because they’re focused exclusively on running a whole bunch of people’s sites. If you’re a big enterprise company, you might have a hard time getting that network engineer to work for you.”

dispelling the myths

One of the biggest concerns about outsourcing has been the fear losing: losing jobs, losing control, losing money. There is still a perception in the industry that outsourcing is the equivalent of handing over the keys of the company to someone who might not understand its history, objectives and vision. This perception is more prevalent in Canada than it is south of the border, according to Jean Charbonneau, Exodus Communications Inc.’s regional director for Canada.

“Typically, our biggest competitor is the in-house operation,” Charbonneau said from Brampton, Ont., who sees this hesitation as a growth opportunity for outsourcers in Canada. “We’re not responsible for job losses; we allow in-house staff to focus on other areas. There’s a concern about people internally, so companies tend to be cautious and need to be convinced of the cost effectiveness of outsourcing. Nobody questions this in the U.S., but in Canada companies still tend to lean towards in-house.”

Richard Blacklock, director of business strategy and development for AT&T’s Global Network Services in Thornhill, Ont., admitted that one potential downside of outsourcing is the perceived loss of control, but stressed that handing control over to the right outsourcer can reap huge benefits.

“If somebody else is running the network and the company isn’t doing it directly itself, there is a feeling of a loss of control,” he explained. “They have to make sure that the company they’re acquiring their services from is customer driven and can actually provide the level of service that they want.

“Part of it is how you treat your customers and your responsiveness,” Blacklock said. “We can do things that they literally couldn’t do by themselves, which is an additional value. [For example], we have helpdesks in 50 countries, because we have a lot of customers throughout the world, so we have support in whatever language you need. We can provide these sorts of additional benefits.”

Another concern about outsourcing is downtime. Some companies feel that by handing the steering wheel over to an outsourcer, the reliability of the application, service or network is also out of reach, and could be costly. This, Beaton said, is another myth that is unrealistic in the broad scheme of things.

“One of the concerns that I hear…is the worry that a failure may occur, an ASP may go out of business or may have some problems and that will rub off on the rest of them,” she said. “The control factor is big. ‘I’m now at the mercy of someone else,’ is the perception. You’re at the mercy of other companies no matter what business you’re in. If you make a tractor, you’re at the mercy of the guy who provides tires for your tractor. What’s the difference? If the guy doesn’t deliver the tires, you can’t deliver the tractor, so you’re still dependent. There are interdependencies. It’s just that companies don’t always look at it like that, so we in the industry need to make them understand that. Why is it any different than the guy who provides you with the steel to make the products that you make? It’s all perception.”

doing due diligence

Annette LaFrance, director of information systems for Recruitsoft Inc. and an outsourcing customer of Coradiant, made sure to avoid an outsourcing disaster by performing adequate due diligence before signing a contract. This included weighing all reasonable options and accounting for reasonable chances of error before deciding on an outsourcer.

“I would recommend shopping around,” Quebec City-based LaFrance said. “I see so many new [outsourcing] companies popping up these days. Find out what kinds of services are offered and verify levels of expertise.”

Bruno Lambert, IT director of IC Axon in Montreal agreed with LaFrance, and suggested that other factors to consider in an outsourcer is the amount of time they’ve been in the market, the sizes of sites that they maintain, their international presence and the number of clients that they’ve maintained.

The best way to avoid an unpleasant outsourcing arrangement, according to Moschopoulos, is to go into the agreement with eyes wide open.

“We believe in right-sourcing,” Moschopoulos said. “Before going to outsourcing, draw a fine line: these are the areas that we need to keep in-house, these are standardized and someone else should be doing it. Perform due diligence for the provider. Get references, adequate provisions and guarantees. This is one way that customers can get over their concerns.”

Factors to Consider

Brian Phelps, president and CEO of Vested Development Inc., suggests considering the following points before selecting an outsourcing service.

    Connect a vendor with a well-defined process methodology with a customer with a level of process orientation within its development organization.Ensure management buy-in for the project.Have defined expectations on both sides of the relationship at the onset of the project.Establish goals, with the vendor and the customer working together to determine parameters including cost and time.Determine a customer sponsor who has total ownership of the relationship.Determine an onsite account manager who acts as a liaison between the development team and client.Ensure that the customer is comfortable with a distributed development environment.Establish a continual flow of communication between the client and the vendor throughout the development process.