Outsourcing's Seven-Year Itch - Page 2

Feb 25, 2008

Julie Craig

Currently consisting of almost 2,000 people, it is responsible for managing outsourced services. Within GM, the role of IT hasn't diminished—IT is still responsible for delivering business services—but it has changed.

There are a few areas where such an outsourcing model tends to be particularly successful. One is when IT organizations utilize it to address those areas of the business that are outside their key competency. For GM, that core competency is automobile manufacturing, not IT. Kudos to GM for realizing this early and moving towards an outsourcing model ahead of much of the market.

What is appropriate for GM, however, is not necessarily the best solution for Google. Google's core competency is technology, and companies like Google excel at delivering IT services. The likelihood that an outsourcer can provide the same combination of leading edge technology, expertise, and innovation that Google has in-house is pretty small.

Targeted outsourcing—particularly of non-differentiating business services—is another sweet spot. In many cases, it makes sense for commodity functions like email management and help desk to be outsourced to a provider that focuses on that service for their daily bread. Does this mean these services are unimportant? Not by any stretch of the imagination. They are critical, but, as long as email is available, it provides little or no strategic advantage over business competitors.

Companies are starting to look at utility services in the same way as they see electricity. Just as most of us rely on the electric company to generate our power and the Post Office to deliver our mail, relying on an outside vendor to deliver utility services makes good sense, especially if the vendor can do it cost-effectively.


SaaS is another option that can become a valuable piece of the service delivery mix. SaaS is a subset of outsourcing in which one or more services described in an IT organization's service catalog are delivered and supported by an outside provider. SaaS has some real advantages, especially for organizations with limited resources and expertise supporting multiple departments and a variety of applications. For a small to medium sized company, for example, the cost of supporting the customer relationship management (CRM) systems used by the sales team, the enterprise resource planning (ERP) software utilized by finance, and the computer aided design (CAD) systems used by engineering can be exorbitant. Delivering ERP and CRM via SaaS could be a viable option, and one that reduces the services supported by internal staff from three to one.

Not to Be Confused

In addition to underestimating the management requirements of outsourcing, there are other “gotchas” as well. One is when outsourcing is combined with off shoring. There is a difference between the two.

Software companies of all sizes are offshoring programming to geographically distributed teams, with varying results. For example, IBM has opened dozens of development and competency centers across the globe. By and large, the people at these locations are IBM employees who just happen to work outside the U.S., offshore employees rather than outsourced services.

In contrast, outsourced programmers aren't employees, they are contracted providers. On the surface, it looks like outsourcing work to such programmers is cost-effective—wages can be as much as 80% less than those of their U.S. counterparts. However, multiple companies are reporting that, in fact, the "real" cost of offshore outsourcing approximates that of using in-country resources in the first place.

Recently, I spoke with an executive from a software company best known for its database management products. His company has been outsourcing programming work to Eastern Europe, but he indicated that, if he had it to do over, he would have kept the work within the Western Hemisphere.

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