Outsourcing: No need to get squashed

The IT outsourcing industry has come a long way from its roots, when a few large, in-house IT organisations sought economies of...

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

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