I wholeheartedly agree with your assessment of the offshore outsourcing market in the cover story ‘Stateless IT’ (Information Age, April 2004). In the new global outsourcing model, IT services companies may need to offer clients more value but that’s often an area where troubles can arise.
Recent surveys indicate that nearly half of sourcing relationships experience significant tension at some point in the contract’s lifetime, which may result in the breakdown of contract terms, reduction in scope or duration, renegotiation or, in extreme instances, a court case. Value-add in a sourcing relationship typically involves access to the vendor’s technology, experience or strategic consultancy, and access to a world-class team for which clients are willing to pay premium rates. Few vendors can provide this level of service, and clients ensure a stable relationship by negotiating long-term contracts.
In contrast, ‘commodity’ sourcing relationships are those where clients outsource non-strategic services to one of many competent providers on a short-term, price-oriented basis. Clients don’t seek significant input on how the job will be done; they just want it done, on time, to price and to spec. Long-term contracts aren’t desirable as new players can enter the marketplace offering significant discounts.
Our research at Compass has found that as long as both client and vendor understand where their objectives and capabilities reside – value-add or commodity – the relationship will likely succeed. Difficulties arise when either party is unsure of, or changes, their position in the agreement. Such shifts naturally lead to organisational and contractual tensions.
For example, a client emphasises access to world-class capabilities but then tasks his or her purchasing department to negotiate contract terms on the firm’s behalf without business unit input. Since the purchasing department is judged by how tightly they write contracts and realise price concessions, the client runs the risk of drifting into a commodity relationship. Vendors who represent themselves as providers of world-class capabilities but then staff engagements with junior practitioners to save costs, are just asking to be pushed in a similar direction.
For clients who make the effort to truly understand the costs and strategic implications of their non-core operations, ‘selective’ sourcing is the third way and often the best approach. In other words, commodity outsourcing relationships are formed under a tightly-constructed, cost-focused contract which includes provisions for termination should the provider fail to meet expectations or a lower-cost provider comes along. In turn, value-add sourcing relationships are negotiated under a long-term, relatively flexible contract in which the client listens to the provider’s advice. For this level of service, the client should expect to pay more than ‘best market price’ and in return regularly receive value-adding input.
In the new global outsourcing model, IT services companies and their clients should know exactly where they stand in the sourcing relationship. A marriage based on selective sourcing might prove to be the most successful approach.
Head of consulting
Compass Management Consulting
Compuware, [the applications management software and services company] recently called for companies to get to grips with application downtime and its impact on the bottom-line.
However, a poll of the top 2,000 European businesses commissioned by BT suggests that over-stretched IT departments find it difficult to carry out this sort of specialised work. Over 60% are struggling to resolve issues around application performance due to a lack of resources (money/people /time) and 11% are short of the necessary skills and expertise.
The tricky part is not putting probes into a network to get a view of performance. The real challenge lies in interpreting the data collected, and in bringing network, application and consultancy skills together to boost the performance and efficiency of the infrastructure and business as a whole – something IT departments are currently struggling to achieve.
What is more, with an economic upturn hopefully on the horizon IT managers will be looking to spend more time exploiting new opportunities rather than acquiring new skills to assist in fire-fighting.
Now is the time for companies to weigh up whether or not they have the expertise to carry out application performance management in-house. If not, one solution could be to hand this over to a trusted third party with the necessary skills to turn the deluge of data captured into something more meaningful.
General manager of IP infrastructure
Following several extremely difficult years, the service sector is showing signs of recovery and the forecasted increase in business volumes is the most positive for some time. But this increase in commercial confidence is prompting a large number of employees to re-evaluate current jobs and there is now a significant danger of major personnel shifts throughout the industry.
A wholesale shift of staff could seriously undermine the potential upturn. The cost to an organisation in losing key members of staff – in operational experience, skills and customer knowledge – is more than significant. Add in the cost of recruitment, training and time taken to become productive and such costs can rapidly destabilise new opportunities.
If the service sector is to successfully work its way out of the economic slump then organisations need to have a better approach to staff development and enable individuals to progress without repeatedly changing employer. This requires managers to recognise and appreciate the aspirations and career expectations of staff and manage the day-to-day work experience of personnel to enable them to achieve their goals.