The IT outsourcing industry has come a long way from its roots,
when a few large, in-house IT organisations sought economies of
scale by taking responsibility for the mainframes or output
production of another company or division.
Suppliers that have survived in the increasingly competitive market
fall, broadly speaking, into two categories: large and niche. The
remainder, typically modest in size, also deserve a mention.
In the large category, we see organisations that can deliver
massive economies of scale by leveraging expertise, infrastructure
and resource. These organisations feature international presence,
staff in the tens of thousands, and often strong links to hardware
provision.
In the niche category, we find many highly successful, driving
organisations which have prospered by specialism in some way or
other. We see companies that have built and sold targeted products
for a particular vertical market. There are also those that have
specialised in one subset of services such as hardware maintenance,
software maintenance or desktop services. There are even highly
successful organisations whose business model is always to be a
subcontractor to a lead supplier.
Finally, we come to the remainder of suppliers, where we find
myriad organisations that are simply not on the radar screen for
larger competitors with acquisitional tendencies, but have
nevertheless built up a strong, if modest, customer base for
services characterised by low cost and basic support models such as
"box shifting".
Common sense dictates that the size of deals struck should mirror
the size of the outsourcing provider. Outsourcing consultancies use
several criteria to categorise suppliers into tiers to refine the
selection process. These categories are constructed predominantly
by analysing the average size and the nature and frequency of
recent deals struck by the supplier organisation.
However, a trend has emerged whereby the largest providers are
bucking the system, deliberately pursuing any and all deals out of
a grim determination to gain market share and prevent niche and
smaller providers ultimately threatening them.
This trend, in turn, has led to several "marriages made in hell",
whereby a customer experiences various disturbing symptoms that
result from being a small entry on the balance sheet of their
service provider. Common occurrences are:
- Base contracts are deliberately underbid, but project work is
loaded to recover profit margins
- "B team" or relatively inexperienced staff are put in charge by
the supplier after an initial honeymoon period
- Even when escalation occurs, the supplier's executive
management team are not interested in customer complaints
- Contract terms, such as termination clauses, are developed by
supplier teams that are vastly more experienced and hardened
negotiators than those fielded by the customer organisation,
leading to detrimental terms for a customer wishing to end the
deal.
One technique to help avoid these pitfalls in outsourcing is
"tier matching" - matching the whole profile of the supplier to the
needs of the customer. One of the criteria that should be examined
when supplier selection is being undertaken is how interested the
potential supplier is likely to be in a long-term relationship with
their customer. What does the business mean to them? Is it
strategically valuable to them as a reference site? Does it give
them an opportunity to leverage existing resources, expertise or
solutions? In the context of their mainstream and recent business,
would the contract be a significant win, or is it dwarfed?
Typically, potential customers will ask if a potential supplier is
big enough to meet requirements, but there is a pressing need to
evolve towards employing tier matching as one of the tools to
evaluate and select suppliers.
Tier matching requires a more in-depth analysis of a supplier's
profile to guarantee a more accurate fit with the customer
organisation and requirements. A structured procurement process,
ideally retaining specialists in the field, will ensure that tier
matching and other best-practice techniques are all employed for
the optimum result and supplier/ customer fit.
Nick Davis is sourcing adviser at outsourcing consultancy
Quantum Plus