For any executive managing a P&L, outsourcing technology services is a consideration every year during budget season. The challenge has always been maintaining quality and stakeholder satisfaction while minimizing cost. As many developing nations began to invest heavily in technology infrastructure and education in the first decades of the century, the availability of skilled resources and associated digital connectivity has enabled effective outsourcing of commoditized technology services.
Enterprise technology services providers (e.g. IBM, HP, DXC) have established operation centers in countries that were previously known for minimal industry and small rural communities such as Costa Rica, Philippines, and Romania. Arguably the top three outsourcing nations in the world: India, China, and Ukraine, each provides an aptitude in a given set of technologies. As an example, Ukraine has touted the greatest number of C++ programmers in the world while India purportedly leads in .Net and Java programmers. The validity of these claims is quite difficult to determine, but it is quite evident that nations are ramping up technology education and capabilities to significantly increase Gross National Income (“GNI”).
Outsourcing has its merits, but it also has pitfalls that require extensive review before pursuing. Every Global 500 organization that Verterent has worked with has examined, and in many cases pursued, outsourcing technology engineering and operations either partially or in entirety. Many technology and finance executives are blinded by the shiny glare of the potential EBITDA contribution, and they glance over what it takes to properly plan, implement, and maintain an outsourcing partnership. As a result, many organizations find themselves in what we refer to as the “Outsourcing 5 Year Cycle”. The cycle is rather simple to describe and follow:
Year 1
Execute outsourcing and realize significant OpEx savings, thanks to the "honeymoon" rate, while increasing CapEx spend in the first 3-18 months to transition assets and operational control
Year 2
Struggle with quality, timing, and cost control of new initiatives and changes to the technology ecosystem
Year 3
Stakeholder satisfaction begins to diminish due to the struggles encountered during Year 2
Year 4
Technology services are brought back in-house, and teams are built to accommodate technology needs
Year 5
The in-house build-up begins to cost too much once again, and the business demands a spend reduction in technology services
Go back to Year 1 again…
What did we do wrong?
There are several major areas in which organizations falter in establishing an efficient and effective outsourcing partnership:
The Master Services Agreement (“MSA”) and Statement of Work (“SOW”) Schedules
Remember the shiny glare noted above? The blinding light of cost reduction takes focus and technology wisdom takes a back seat. We have seen quite a few organizations enter into an MSA and SOW that are weighted proportionally towards the outsourcer instead of being well balanced in favor of both parties. The key is to remember that the technology outsourcer is better at establishing the MSA and SOW than your organization. Taking your organization’s money is what outsourcers do for a living, and they happen to provide technology services along the way. They are much better at defining service rates, scope, Service Level Agreements (“SLA”), and Key Performance Indicators (“KPI”) than the client organization, and they know it! Your organization provides widgets while the outsourcer provides technology services for money. Realizing this will slow down the negotiation process and generally lead to a more thorough evaluation of what is needed.
If an organization fails to define favorable terms, technology practitioners will become annoyingly familiar with an industry phrase: “Non-Standard Service Request”. If an organization does not define the scope of services and expectations for deliverables, the outsourcer will often push many of the client requests into the Non-Standard Services category. Once a client request is in this bucket, the time to completion and cost will balloon significantly.
The outsourcer will require a Project Manager as a commoditized request is now considered a full-blown project, the service rate will increase due to being non-standard or special, and what should have taken a week and cost nothing will now take several months and cost an absolutely unreasonable amount of money. To protect the organization from Non-Standard Services, ensure services in-scope for the outsourcing agreement are detailed and robust. The MSA and SOW will take a great deal of time to refine, and the resulting documents will be the thickness of a cinder block; however, the time spent in defining what is in scope for the service will minimize consternation in years one through three.
Don’t assume existing employees represent a 1:1 relationship with their assigned role
The first thing every executive will do when considering an outsourcing agreement is to quantify the headcount by role. Outsourcers will specifically ask for this as they can perform a quick head-to-head comparison and produce a reasonable cost savings figure. As an example, a senior network engineer in the US grosses on average $10,500 per month in just salary. The outsourcer will marry this figure up to an offshore senior network engineer role that is rated at $2,200 per month. This is a massive savings and a win-win for the organization.
The challenge is that an existing senior network engineer is not just performing the role of a network engineer. In nearly every situation, this resource is performing multiple roles and maintaining services outside the scope of his/her job description. When an organization outsources roles, the many to one relationship that the existing employee maintained no longer translates to the outsourcer. The outsourcer will provide services specific to the job description and nothing beyond. If the request falls outside of the role boundaries, the request is now considered a Non-Standard Service Request.
The dark and dirty secret of in-house technology functions is that some of the services provided are being held together with duct-tape and rubber bands. This is actually a good reason to outsource some functions as the disheveled and patched together system running mission critical applications will be surfaced and addressed. The issue is that the patched together mission critical applications were not documented, did not follow a defined standard or architecture, and the employee maintained the dependencies through tribal knowledge and shear will.
When an organization outsources roles, it is inevitable that these systems will be discovered during emergency situations (e.g. application is down, malware infection on network, license audits) and result in an extraordinary amount of discomfort to address. The outsourcer will not pick up this newly discovered environment due to it being unsupported, non-standard, and not documented. The client organization will rush to hire back those that may have knowledge of the system, and the cost savings of outsourcing is now diminished.
Maintain strong leadership and roles focused on outsourcer governance
Effective management of the outsourcer is key to a successful outsourcing partnership. The outsourcer is not going to intentionally falsify or allow for errors or omission, but outsourcers are not perfect and will make mistakes that may result in service failure or added time and cost. Establishing strong leadership, which includes technical leads, and roles focused on outsourcer governance will ensure that errors are caught and corrected in a timely manner.
In order for governance to be effective though, SLAs and KPIs need to be well defined, monitored, and enforced consistently throughout the service agreement. Even though we like to call relationships with our service providers a “Partnership”, the reality is that the provider has its own interests in mind when making decisions, as do we. Remember, the provider’s goal is to acquire as much money possible for the product or service provided while our focus is to receive the best product or service and maintaining an appropriate cost basis.
Monthly governance review sessions should be established, and any SLAs misses or Non-Standard Service Requests should be reviewed in full by both parties. Failure to achieve SLA milestones or incorrectly categorizing a request as non-standard should result in a service credit commensurate to the severity of the failure or error. The point behind the service credit is to inflict a bit a pain to the outsourcer and re-align the outsourcer’s attention back to your account.
The outsourcer is providing this service to many clients, unless the outsourcer is a captive organization, and the focus will typically be on establishing new business over maintaining existing unless there is a threat of service termination. The "honeymoon" phase referenced above is generally a period ranging from service go-live to 18 months in which the outsourcer’s top talent is engaged and SLAs are monitored extensively. After the "honeymoon" phase has expired, expect to see more SLA misses and quality hits.
Retain ownership of technology assets and control over data center agreements
While relinquishing all technology assets and the burden that comes with managing their lifecycle sounds rather appealing, doing so will put an organization in a precarious position when negotiating with outsourcers. If the outsourcer owns the physical/software assets and the lease(s) to sanctioned data centers, attempts to move away from the outsourcer are incredibly difficult and expensive to execute. In some situations, the outsourcer is willing to execute the sale of assets and an assignment of the lease(s) to the client organization; however, some vendors will not allow this. Re-instantiating new agreements while under duress will rarely result in a better deal.
The capital cost of building up, migrating, and operationalizing (e.g. reconfiguring systems, establish monitoring, enact management and lifecycle processes) assets into a new data center can be extraordinarily expensive and time consuming. If the client organization has retained ownership of the assets and lease(s), replacing an outsourcer becomes less about the assets and physical location and more about the on-boarding of a new outsourcer. From a pure asset perspective, the ownership of the asset has little impact in financial terms. Purchasing assets and amortizing/depreciating them tend to result in the same financial outcome as paying a subscription or lease fee to the outsourcer.
The outsourcer may receive preferential pricing from asset providers that a client organization will not, but the outsourcer will also tack on a double-digit margin to increase profits and cover unknown expenses. For example, we’ve coordinated the move of several data centers, from the client organization to the outsourcer primarily, and the effort can take anywhere from three months, for a small organization, up to 18 months. There will be multiple failed starts, reverts, and overages in cost. Avoiding a data center migration is ideal and easily accomplished if carefully planned during the initial outsourcing design.
Is Outsourcing The Way To Go?
While we highlighted deficiencies in executing outsourcing agreements, the team at Verterent is very much an advocate of outsourcing commoditized services. Unless your organization is in the business of providing technology services, there is little reason to maintain all technology services in-house. Outsourcers are able to provide a comparable service at reduced cost, effectively allowing your organization to focus on the core business instead of support services. Quality of service will decrease, but it is the balance of cost and satisfaction that leads to a successful outsourcing arrangement.
Failing to execute a detailed and robust MSA and SOW(s) and enforce proper outsourcer governance will increase the likelihood that the outsourcer will nickel and dime your organization to death through the Non-Standard Service Request clause. The result of which is a lower quality service at an equal or greater cost than in-house services. Business satisfaction will decrease over time, and the 5 Year Cycle will begin once again.
