Has the outsourcing industry collectively conspired to strip its value?

I blogged yesterday about how quiet things are in the IT outsourcing market at the moment. I asked for peoples’ views and have had some interesting feedback.

Robert Morgan, director at sourcing consultancy Burnt-Oak Partners says. It is “too easy to blame the economic recession” for the current lull in outsourcing activity.

Read his full comment here: “Outsourcing has become synonymous with cheap service rather than Business enablement via using third party assets and know-how. It is a huge subject and the below simplifies things possibly too much, but the points below will offer insight as to the root causes of a lack a deal activity.

Blame sits with three entities:

1-Clients who have handed outsourcing service responsibility to junior management and procurement departments who push for lower pricing, plug and play service agreements, short contracts and high overhead multi-sourcing. Management then fail to provide training and governance for the hapless Service Relationship Management (SRM) team;

2-Intermediaries who have prolonged procurement cycles to maximise revenues to the point where doing global deals takes 18 months, or fixating on multi-sourcing which again is to maximise earnings. They carry zero responsibility or skin in the game after completing the assignment. Measurement of success still lives in techno-babble and not business related measures. Resurgent procurement departments where external advice is shunned or un-budgeted for, merely add to the downgrading of workable contracts, insight, risk mitigation and supplier accountability.

3-Service providers whose executive is technically and not business orientated and who fail to understand how to raise outsourcing importance up to client executive level. Suppliers employ technologists to sell services to technologists, rather than business enablement via technology. The Executive command the headlong rush to automate and virtualize everything via cloud etc. This is in turn makes everything transportable – real plug and play – denying the value of relationship and loyalty. Salesmen are overpaid and totally self-centred around how to maximise the commission payable not the best client solution. These days outsource service providers do not want your staff or assets thereby defeating a large-part of the Business Case to externalize.

Add all these aspects together and we collectively have conspired to strip outsourcing of its value and pivotal importance as a strategic tool for the benefit of the business. Hence times are very quiet in outsourcing.

However before you lose all hope; Burnt Oak believes that new shared equity models with real mutual commitment to risk sharing, investment rules, and common directorships for client and supplier, etc offer a real opportunity to reinvent enablement of Business through outsourcing.”

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This is interesting:

"These days outsource service providers do not want your staff or assets thereby defeating a large-part of the Business Case to externalize."

The initial boom in outsourcing was typified by companies outsourcing existing IT departments (under TUPE agreements), with those staff often being replaced by cheaper onshored/offshore staff at the earliest opportunity. This is simply a form of asset-stripping when considered in terms of the loss of UK-based jobs, skills and tax revenues.

Now Morgan seems to be suggesting that the low-hanging fruit have all been gathered, and the outsourcing model no longer offers such easy profits. A bit late, when the damage has already been done to the UK IT skills base and employment market.

But maybe now the outsourcers will actually have to demonstrate that they can deliver genuine benefits, beyond short term get-rich-quick asset-stripping scams, in order to justify their existence.

I think that since the 1990s we have learnt that:

- No matter what reason people have outsourced for, after a while it all becomes an issue of costs.

- We have proven that with outsourcing we can make savings which we would have made, if only we could be bothered.

- Outsourcing is a great way of squeezing operating costs at the expense of higher costs of change and less agility. Also, commitment over a long period of time is like a financial cost straight jacket, which does not suit many customers need to exercise flexible control over costs, in line with market conditions.

- There is no magic outsorcery pixie dust. Outsourcing companies are subject to the same issues as their customers: talent shortages, legislation, 3rd party supplier costs and behaviour. At the same time they have to deal with the complexity of doing things for many customers with widely different requirements. So they tend to standardise and be conservative to reduce their problems, which is often in conflict with customer needs.

- Everything as a Service (SaaS, IaaS, PaaS etc.) is a challenging new model which has not quite been cracked. This leads to problems with committing to a new service: Risk immature XaaS or go with traditional services which will soon look expensive.