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Managing Outsourcing Relationships

June 10th, 2021

While virtually every business now relies on information technology (IT) to help provide services or deliver products to the marketplace, things have rarely been more precarious for in-house IT professionals. This is so, despite the conventional wisdom that IT is acknowledged to be more strategic than ever.

Increased market competition, more demanding customers, tighter margins and shorter product life cycles have caused businesses to examine where they may be able to focus better on core competencies, reduce risk and costs, and become more agile and competitive. For many companies and small businesses across all industry segments, outsourcing IT is the only answer.

Outsourcing lowers operating costs, eliminates backlogs, improving data input quality, production and document availability. And, in the end, outsourcing adds profits to the bottom-line.

But outsourcing is far from a panacea. How an outsourcing relationship is managed – internally and externally – is as important to its ultimate success as the execution of the outsourced tasks themselves. Given that industry analyst Gartner recently reported that outsourcing can trigger an employee backlash, what do organizations need to know to make outsourcing a win-win for all concerned? How can a company best manage the firm that it has just retained? What project management issues does outsourcing solve and what challenges does it entail?

Outsourcing on Paper: Cost-Effective, Valuable, Efficient

Outsourcing IT isn’t only (or even primarily) about costs. In terms of hard dollars, outsourcing isn’t always a decisive win over the in-house approach, although it usually is. The real advantages can be seen in the “soft gains” that accrue — the opportunity costs of not having to reinvent the wheel, and the efficiencies that arise when enlisting a company that specializes in doing the heavy lifting of IT.

Quality is an issue as well. In the hosting market, for instance, a company could hire five system administrators to run their network in-house, and find the collective wisdom limited to the specific experiences of that small team. When a third party assumes control of servers and infrastructure, that firm brings real world experience, gleaned from facing an array of problems across a diverse customer base. Dynamic learning occurs more rapidly because the outsourcing firm is simply in a better position to benefit from — and propagate — “best of breed” practices.

Managing and retaining IT staff is challenging enough in prosperous times; in a down economy, the challenges intensify – and the management responsibilities in outsourcing likewise increase. Keeping IT staff motivated, focused and incentivized is perhaps the most formidable challenge. If an organization’s IT returns on investment is on the order of 20-30 percent, reinvention and retraining are apt to be continuous. Accordingly, whether the market is up or down, the case for outsourcing persists. By contrast, if the organization has kept IT entirely in-house, it becomes considerably harder to double, triple or even cut staff, should the need arise. An outsourcing relationship ensures a constant pool of talent.

Outsourcers are occasionally brought in to “clean up” unfinished business left by in-house teams that, for whatever reason, didn’t see a project through to completion. It is always difficult for organizations to have to cut staff or downsize IT operations, especially for professionals who are accustomed to bigger budgets year after year. And when the mandate comes down from the CEO or whomever that IT budgets aren’t going up — and the only way the company is going to make its numbers is to let go of some of its people — doubt looms large. That is the environment in which the quality of the management of outsourced relationships makes all the difference.

Outsourcing tends to occur in waves. Even during those periods when outsourcing is relatively less in vogue, many organizations still elect to outsource non-core functions. The hot topic right now is offshore vs. onshore outsourcing, but overall, the ebb and flow is modest. Outsourcing isn’t trendy; indeed, when factoring in the earnings of public companies engaged in IT sourcing, outsourced IT, represents a highly stable segment of the economy. Against this backdrop – and with an eye toward making the relationship between the outsourcing firm and its client organization productive for all concerned – it’s necessary to lay down a few rules.

Rule #1: Get Internal Buy-In

Let’s face facts: effective IT outsourcing usually means layoffs — and it can change the jobs of some of those who remain. If an outsourcing firm is brought in to displace existing IT staff, internal buy-in must occur well before the decision is made to bring in that third party. Management must know (and intelligently communicate) that headcount will be reduced by so many and that a plan of action exists to ensure that these cuts, however painful to those involved, ultimately boost the organization.

The best route to obtaining internal buy-in is to move incrementally. Outsource those projects linked to marginal products, rather than to strategic ones. Create an environment where the third party complements existing staff rather than replacing them outright. Doing so, can help promote in a sense, over time that, internal staff can be deployed somewhere else — or even let go. The more strategic the project is, of course, the greater the political heat; the less strategic, the easier it is to get that buy-in for outsourcing.

Rule #2: Go Beyond Buy-in to General Consensus

“Buy-in” suggests a passive kind of acceptance. Effective management of outsourced relationships strives to go a step or two beyond. When the outsourcer arrives on the scene, a residue of resentment or lack of understanding frequently follows. The key to defusing that resentment is transparency on the outsourcer’s part, in terms of both its operations and the organization’s goals. When all parties can view how the outsourcer works — through a portal product or some other mechanism — it immediately becomes less likely that signals will get crossed and consensus may be within reach.

While it’s helpful for the outsourcer to embrace a new assignment with enthusiasm, that energy isn’t always enough to counter the feeling among some that this new third party poses a threat. If management is savvy enough to know that some resentment is inevitable, gentle prodding of recalcitrant IT staff members toward a positive outcome can be decisive.

Rule #3: Counter Backlash with Education

Employee backlash is often manifested in passive-aggressive ways — not sharing immediate deadlines or the full scope of the assignment with the outsourcer, for example, thereby triggering talk that the outsourcer isn’t delivering on the promise. Education is an effective antidote to situations where the ground hasn’t been cleared as well as it should have been in advance, and can reverse uncertainty, ambivalence and even downright hostility.

Situations occasionally occur when those new to outsourcing approach the outsourcer with assumptions that don’t turn out to be well-grounded. This pattern was chronic during the dot.com era, where companies were built overnight and needed to tap a huge skill base at a moment’s notice. In some cases, managers themselves were new to the outsourcing process. Demands for instant response were complicated by requirements that armies of internal IT staff also be involved in the process – hardly a recipe for mutual success.

Education should begin during the sales cycle. Determine how educated the organization is on the outsourcing process and see if they’ve done it before. It always helps make our lives a bit easier in terms of fulfillment of the service later on. The more knowledgeable they are on how to manage this relationship the more successful it is going to be.

Rule #4: Communicate — To Avoid Asserting Control

Companies win with complete communication. In outsourcing, communication’s twin is control – and the perception of control. It is vital that the outsourcer never seizes control from the customer (or appear to do so) because that is when complications arise. Maintaining open lines of communication so that the customer feels he or she is still in control — and having a portal-type product that provides a complete window into the operation — is vital to securing a strong, stable relationship. At the end of the day, a client who feels in the dark may well assume the outsourcer isn’t fully on the case.

Rules #5: Clarify Roles, and Stick to Them

In today’s market, most organizations have tried various outsourcers, with varying degrees of success. Because not every encounter is a positive one, companies often have their defenses up, and it’s not unusual for hurdles to exist at the outset — even in a fresh relationship that isn’t immediately leading to job loss. In that environment, the very best way to overcome these hurdles is to emphasize the (non-threatening) partner role: that the outsourcer is more of an offshoot of the IT department than an adversary or replacement. The consistent goal is to make it easier for IT managers and IT staff to do what they must do to meet the business’s needs. The outsourcer’s key function is not just to affect head count; it’s to help the organization improve upon the services it could obtain internally at a given budget level.

Rule #6: Learn and Apply Patience

It takes typically about three months before both sides in a relationship are fully comfortable with one another and truly understand mutual expectations. Even for outsourcers with well-defined processes, writing that custom playbook takes a bit of time. Patience invariably fosters teamwork, and avoids common laments (e.g., “I’m opening a trouble ticket with so and so, and who knows when they’re going get to it?”) that can afflict outsourcing relationships. Once the mutual discovery phase is over, it’s time to for everyone to get comfortable with how things are going. At that point, however, if the comfort level isn’t there, for any reason, it’s an optimum time for management on both sides to examine why.

Rule #7: Impose and Enforce Structure

In order to have a successful outsourcing engagement, companies need, clear, concrete goals. A goal shouldn’t be something vague (like, “we want to get our IT outsourced”), it should be as concrete as, “we offered our exchange server hosting to this company and we will make sure that service availability is 99.9 percent or greater.” To hit that goal, organize formal, frequent meetings (even twice a week) until everyone knows what the milestones and the deadlines are. After the first few months, once a decent product or service is up and running, it’s less important to adhere to a rigid structure around deliverables. Weekly meetings, with an overview of outstanding items, new items, upcoming items, etc., should suffice.

Management has a major role to play here. Prior to bringing in an outsourcer, some organizations find that IT staff has been sitting around doing very little, if anything. That isn’t because there is nothing to do — it’s because management hasn’t said, “Here’s the IT project, here are the goals we have, here’s what we have to do, here’s what will help us strategically.” Because these edicts are not handed down, no one has been clear on the mandate. In an outsourcing relationship, by contrast, there tends to be a great deal more specificity because hard dollars are leaving the company. The best discovery meetings address budget issues head on; the charge then becomes to determine exactly what the organization wants from its investment. What is the goal? What is the value to the organization? What’s to come out of this? These are the kinds of questions that make for smoother relationships.

Rule#8: Keep the Humanity in the Equation (then, re-read Rules #1-#7)

In the end, outsourcing is a human-centered business. Emotions do come into play, since jobs are ultimately at stake. Keeping that big picture in mind, have a clear-cut goal for what the relationship is going to be. Identify and maintain a single, designated point of contact as to who is tasked with managing the outsourcer; don’t have six contact people, and don’t let management responsibilities stray from the IT realm to other departments. Have weekly review meetings with the outsourcer to make sure that goals are being hit; don’t assume that the outsourcer is doing its job.

Ask for feedback from the outsourcer; use this seasoned third party as a live, informal auditing arm. Ask for ideas about recommended internal improvements. (Side benefit: if the outsourcer doesn’t offer input, that in itself may be a red flag.) Good outsourcers will always find issues, because the nature of the business is to gain an intricate look into internal operations. If the outsourcing relationship is on a solid footing and the outsourcer is on its game, the firm’s best practices will come into play. That, in turn, should provide ample comfort to everyone involved — and retire the backlash in the process.

DACH IT Outsourcing Markets – Industry Tendencies For 2007

February 10th, 2021

Throughout 2007, the information technology and telecommunication market in EU-countries is expected to demonstrate 2,9 % increase (668 billion Euro value) as compared to the previous year. This data is verified by BITKOM (German Association for Information Technology,

Telecommunications and New Media e.V.) and recent research by European Information Technology Observatory (EITO). Dr. Bernhard Rohleder, CEO for BITKOM forecasts positive market dynamics for 2008 at the same growth margins. The guiding industry segments encompass Software (6,5% per cent growth) and IT Services (5,5% growth).

When supply meets demand: the case of IT outsourcing

Nearly two thirds of the interviewed firms declared their intent to employ extra personnel in 2007. In this sense, the shortage of the highly qualified IT resources is being considered as a substantial challenge to the long-continued development of the information technology industry. As far back as in 2004, Gartner consultants estimated that before 2010 up to 25% of the traditional IT jobs in the Europe will be outsourced to more cost-effective locations. However, taking into consideration the current outsourcing growth rates, the quantitative dimension of this trend will be even more impressive.

According to BITKOM research, 43 per cent of German IT-firms experience problems with staffing. During the coming years this trend will become even more visible due to demographic decline, shortage of highly qualified personnel and yet good IT market opportunities. Approximately 20,000 job positions in German IT sector are currently unoccupied. Most popular job offerings include well-trained software developers, IT project managers and IT consultants.

At the same time, the growing demand in the IT personnel market brings about corresponding proposition from the foreign outsourcing vendors and consequently toughens the competition among the IT providers from abroad. Approximately 58% of the Schwartz Public Relations interviews have expressed their willingness to outsource the activities associated with IT Services domain to nearshore and offshore locations like CEE, China and India. Unlike the nearshore competitors, Indian IT-specialists are unwilling neither to work on onshore contracts nor apply for German Green Card.

IT outsourcing: attractions and concerns

As outlined in recent publication in CIO magazine, the main driving force behind outsourcing remains cost reduction, this aspect gains additional significance for larger enterprises. Additional reasons for outsourcing encompass betterment of services, achieving flexibility and conformity to industry standards.

Judging from the outcomes of CIO-Online Survey, 77 per cent of the interviewees outline loss of know-how as the major risk of outsourcing. It has demonstrated visible opinion shift as compared to 2005 poll: professional know-how loss constituted significant concern “only” to 36 per cent of surveyed professionals, while inappropriate quality caused substantial problems to 48 % of the interviewees. Additional arguments against outsourcing included overwhelming dependence from the provider, loss of primary competence, security issues and lack of adaptable processes. overhead, non-transparent business models and failing to meet deadlines.

Wolfgang Janko, Austrian IT industry expert mentions that the first and foremost rule of outsourcing is: “never to outsource the IT services, which constitute the core competence of the enterprise. It is the mistake that has been executed by nearly 60% of the surveyed companies”.

However, effective risk mitigation strategies along with carefully examined and mutually agreed partnership conditions are capable of minimizing the unwanted outcomes of outsourcing.

Swiss outsourcing times: mega-deals left behind

The analysts from Active Sourcing estimate the overall Swiss IT outsourcing market volume in nearly 12,9 billion Euro. The market analysis by German-French corporation PAC supposes that during 2006 – 2010 Swiss IT outsourcing market will grow at 7,5 %. The leading IT outsourcing-consumers among industry verticals include Retailing, Public Sector, Transport/Tourism, Telecommunications and Insurance. In relation to “big deals”, Finance sector continues to occupy prominent positions: 84% of the IT outsourcing agreements with more than CHF 10 million total cost of contract were concluded during the last twelve months in Finance/Banking industry. The leading position at the Swiss outsourcers ranking list occupies IBM; its close competitors include Swisscom IT Services, T-Systems, EDS, HP, Accenture and CSC.

Judging from the statistical data for the beginning of 2007, the total cost of the contracts is decreasing, with the era of mega-deals switching to multitude of middle-size contracts in private sector. Over the years, SME segment is gaining increasing popularity among IT service providers. Other trend that is obviously taking place is multisourcing, selective distribution of IT tasks among diversified providers; it capacitates the minimization of client’s dependence from single source of outsourced software development and occupies prominent niche within the fastest growing trends. The outsourcing clients are getting more and more equipped to manage multiple vendors simultaneously.

The IT market experiences the second wave of outsourcing, with contract renewals and greater acknowledgement of strategic partnerships being on the top of the agenda. Outsourcing providers are modifying their offerings in sense of increased client expectations and emerging new technologies. Broadly speaking, the price and service offerings of the outsourcing providers in most cases do not have tangible difference. The most important aspect remains, particularly for German-speaking market, individually tailored client approaches and working towards satisfying the needs of customer’s business. As for the Swiss IT outsourcing market, nearly three fourth of all contracts with IT service providers are renewed. However, according to data publicized by Active Sourcing, during the third quarter of 2006 the newly signed contracts dominated on the market.

German outsourcing landscape: even more benefits for larger enterprises?

Throughout 2004 – 2006, the German outsourcing market has grown by 8 per cent, totalling EUR 12 billion. Starting from 2006, the market dynamics has accelerated, amounting for 11 per cent annually; the figures for 2007 are expected to reach more than 15 billion Euro. According to recent IDC investigations, its market share comprises 38%. German top IT outsourcing providers encompass IBM, Fujitsu, Hewlett-Packard, Siemens, EDS, Info AG and TDS. IT outsourcing acquires paramount importance for German enterprises: as mentioned in Meta Group market investigation, 37 % of the companies are willing to execute partial or complete outsourcing of their IT activities. Another survey by CIO.de, conducted at the end of 2006, provides clear evidences that 51% of the interviewees plan to outsource their IT activities and 15% are still undecided.

The 30 largest IT providers in Germany occupy approximately 60% of total market volume, with the rest of the numerous smaller market players: regional providers and IT branch establishments. The IT service landscape in Germany is also characterised by increasing number of mergers and acquisitions; notes of transactions interest exists both from foreign providers and German IT companies.

According to A.T. Kearney consultancy, IT providers operating in Germany could be classified as follows:

- Global Players (extensive service portfolio, min. EUR 10 billion turnover);

- Major Regionals ( broad service portfolio, regional or country-specific focus, EUR 1 – 10 mln turnover, approx. 40% foreign capital involvement);

- Indian Firms ( major focus on software services, mid-ranged service portfolio, EUR 500 mln. – 2 billion turnover);

- Captives ( branch establishments with delivery models oriented to associated company, EUR 50 mln. – 1 billion turnover, overwhelming regional course);

- Second-Tier ( regional firms, up to EUR 500 mln. Turnover, specific service focus).

The ‘big deals’ pattern on the German market much resembles the Swiss one: multi-million contracts are becoming a rare case, with the projection of turning into exception in the nearest future. Selective outsourcing is gaining more and more popularity, involving partial infrastructure components or certain business processes. The substantial number of industry players from Finance, Telecommunication, Media and Insurance verticals outsource their IT processes to external vendors. Another interesting note: the bigger the company, the greater emphasis is laid upon outsourcing: Meta Group survey results for companies that employ more than 5,000 staff members testify that 46% of the corporations take advantage of complete or partial outsourcing.

In outsourcing of applications the lead take ERP programs (especially SAP), another 12 per cent occupy CRM-applications and branch-specific solutions. The prominent role in German IT market plays offshore outsourcing, besides Indian subcontractors, the significant market share retain CEE and SEE outsourcing providers, working within well-established and cost-attractive niches. The recent years have given birth to brand new models of both ITO and BPO: “Software as a Service”, “On Demand Sourcing”, “Dynamic Infrastructure” and “Shared Services”.

Outsourcing in Austria: growth fueled by SMEs

As publicized by IDC Study, until 2010 Austrian market for information technology services will grow by 3,9 per cent. In 2006, the Austrian IT market volume has increased by 2,9 %, keeping step with EU average indicator. When evaluating rankings, the major IT service players, the lead takes Siemens Business Service, followed by Raiffeisen Informatik, iT-Austria and IBM. The most dramatic development is being demonstrated by open source and IT security services. Since 2004, the most significant IT business domain remains outsourcing (36% of market share). Siemens Study adduces new arguments for increased dynamics for IT outsourcing market in Austria. While international analysts measure the market development at 12 %, Siemens experts forecast even more rapid IT outsourcing growth. The most important IT business domain in Austria remains outsourcing with market share of 36%. While the complete outsourcing of the IT infrastructure experiences stagnation, such segments as application management along with network- and desktop-outsourcing demonstrate visible growth from 11,8 to 13,8 %.

The outsourcing clients are willing to invest in the issues with a long-term effect: service-oriented architecture, enterprise application integration and web services. Much emphasize in outsourcing services is placed upon innovation in other to beat the competition. The powerful incentive is given to industry-specific solutions. According to IT branch analyst Christiane Pütter, Austrian SMEs are making their choice in favour of ERP and CRM solutions. The efforts of IT outsourcing providers are focused on Austrian small and medium enterprises. Joachim Seidler, Branch Manager at IDC Austria notes that “nearly 60% of IT outsourcing services in Austria is delivered to SME segment”. The subcontracting of IT and Telecommunication infrastructure to external providers proves to be of utmost interest to Austrian SMEs. Carlo Wolf, CEO of Cisco-Austria estimate the SME segment growth at 20% margin (overall market potential approx. 300 mln.), although this market share seems to be relatively small.

Currently, partial outsourcing is a popular trend among Austrian IT companies. Albert Felbauer, CEO for Siemens Business Services Austria, shares his industry look-out: “Nowadays Austrian enterprises, which are engaged in outsourcing relations, subcontract approx. 20 – 30% of their IT activities”.

DACH outsourcing market: a look beyond

To conclude with, the IT outsourcing market in DACH-region is going through impactful transformations: mega-deals becoming a rare occasion and nearshoring and multisourcing gaining more prominent positions. The outsourcing agreements are being concluded for shorter periods, with selective outtasking becoming a viable trend.

While the IT budgets within the companies are not substantially pushed up, the IT analysts anticipate stable outsourcing market growth (7 – 10 %) in the years to come. Branch-specific services are winning dominant market share, with Finance/Banking solutions taking the lead. The new outsourcing era will be marked by the powerful wave of merges and acquisitions, especially among CEE outsourcing providers and DACH IT corporations. SME market, including start-ups, would also generate constantly growing demand for outsourcing services, toughening competition between outsourcing multinationals and nearshore providers.

About Intellias Ltd.

Intellias is an ISO-certified software development company with its Development Office in Lviv (Western Ukraine) and Sales & Marketing division in Zürich (Switzerland). The company specializes in Internet/Intranet Applications, Distributed Systems, MS Windows Applications as well as Embedded Systems. From the outset of its market presence, Intellias has completed more than 200 projects worldwide, featured with excellence of technical expertise and reliability of partnership m