My Perspective
Thoughts from Rich Brennan

Outsourcing – 5 tips for success

December 23rd, 2009

Needless to say, the last two years have been difficult on companies of all sizes.  Nowhere has this been felt more than by the internal IT organizations responsible for maintaining a company’s technology operations.  With tight capital and reduced staffs most technology organizations have struggled to maintain the day to day with minimal focus on forward looking initiatives.  One strategy that we see more companies exploring is the outsourcing of application management and technology operations.  While hardly a new strategy, many companies are being driven to consider it for the first time due to current business conditions.  While there are numerous horror stories of outsourcing initiatives gone bad, here are 5 things companies should do to put them on the path to success.

Establish a governance model – A governance model creates the framework under which you are going to manage the ongoing outsourcing relationship. It should address areas such as performance metrics, issue remediation, introduction of new technologies and processes, staffing, and problem management. While this list is not complete, it gives you an idea of what needs to be addressed. One critical point here is that this is not an IT only exercise. The biggest mistake a company can make here is not including business or functional owners, executives, and in some cases board members in the creation and approval of the governance model.

Know who you are outsourcing to – There are outsourcing firms of all sizes from niche providers to global organizations and none of them are invincible to troubles as we saw earlier in 2009 with Satyam one of the Indian outsourcing firms. You need to perform due diligence on the company before you sign any type of agreement. The due diligence should cover areas such as financials, operations, growth and expansion plans, and staffing plans. A key question to ask is how will they operate if growth or financial plans are not met.

Consolidate initiatives – Outsourcing is difficult enough to manage without having to manage a bevy of outsourcing providers with different metrics, measures, processes, and contracts. Also, by consolidating all of your initiatives to one or two vendors you can gain scale economies that will bring cost benefits to your organization. In the past we outsourced maintenance and development activities to one firm as the primary provider and then had a second firm perform small projects so that a) they became familiar with our system and to our people and b) it kept our primary provider on their toes.

Start small – Unless you are very experienced with managing outsourcing initiatives and have a provider working with you, start with smaller initiatives. It allows you to work through the governance model with a manageable project. As you successfully deliver you can roll into more projects or multiple efforts simultaneously.

Outsource what you know – The initial reaction to outsourcing is to unload that system that nobody understands and that always breaks. Unless it is a 3rd party package and your outsourcer has tremendous experience with it, this is a big mistake. At one company I worked at, we outsourced an HR function hoping to learn ‘best practices’ from the vendor since they were working with so many companies on this. Needless to say it didn’t work out as we thought. You need to know what you are outsourcing so you can manage the relationship, establish the metrics and measures, and hold your partner accountable.

Outsourcing is by no means a trivial initiative and things will go left when you want them to go right. It is inevitable. By putting these 5 tips into action you greatly increase your odds of having a successful outsourcing experience.

To Outsource or not-to-Outsource

November 30th, 2009

In today’s business environment, it is hard to not have been impacted in some way by outsourcing. Either you yourself have been impacted or someone you know has been impacted. It is the business environment that we live in and while the politics around it can get messy, I would rather stay away from that. At its core, I believe that outsourcing certain business functions makes tremendous sense when viewed and implemented through a strategic lens.

One of the first mistakes made when a company decides to outsource functions is not having an understanding what they are trying to accomplish through outsourcing. The days of outsourcing purely for cost-savings are long gone. The second mistake made, the one we will address here, is outsourcing the wrong functions. So how does one determine which functions represent good outsourcing candidates? Let me propose a simple framework to assist in determining what to outsource. While the framework is simple, the analysis that goes into utilizing the framework is anything but.

In looking at the business functions (and here I include technology functions as business functions) we look at them across two dimensions – How good are you at the function and How critical is the function to your business. Let’s look at the first dimension – How good are you at the function. To determine this there needs to be a benchmark – preferably against a competitor – to help you determine where you stand. The benchmark could be cost or quality based, time to market based, or customer satisfaction based but it needs to be measurable and comparable. The second dimension – How critical is the function to your business – should be viewed as the ability of the function to differentiate you in the market to your customers. While many functions are necessary, only some of those are business critical. The perfect example of this is payroll. Payroll is a necessary business function but it does not differentiate you in the market. Trust me, none of your sales team is talking about your ability to complete payroll during a sales call. While it needs to be accurate and timely it hardly generates additional revenue.

Now let’s view the business functions across those dimensions. If the function falls in the upper right hand quadrant – highly critical and you are best in class – the function should be maintained in-house. If, on the other hand, it is highly critical and you are terrible at it you have two choices – invest to improve your capability to perform the function or find someone else who can do it better. You get the picture – and if you don’t here is a picture for you.

Strategic Outsourcing Framework

Too often companies decide what to outsource based on only one of these dimensions – business criticality and if the function is business critical then they refuse to outsource it. If it is truly critical in that it differentiates you from the competition and you are really good at it then it is a good decision. If not, then you could be making a mistake.

What is Corporate Strategy?

November 25th, 2009

Recently the McKinsey Quarterly asked the above question in relation to the traditional strategy development tools such as Porter’s 5 Forces, BCG Growth-Share Matrix, etc. The question really is, do these techniques remain relevant in today’s business environment or not? While they certainly have their place in the strategy process I would argue that they are relevant only with some modifications.

First, the above mentioned frameworks, as the McKinsey article points out, have three assumptions at their core:

    1.  The industry under study is comprised of unrelated buyers, sellers, and competitors.
    2.  Structural advantages are the primary source of value.
    3.  Uncertainty is at a low enough level that competitor moves and responses can be anticipated.

Taking these assumptions individually we see that they really are not relevant in most cases today. In today’s business environment industry are not straight-forward and we find that buyers of a service can also be competitors in closely related areas. Industry structure is clearly not arms length anymore. A key strategic component that is missing is the idea of alliances where the combination of products and services create value.

Given this change in industry structure we can easily see that value, extremely high value, can be driven from areas that are not structural in nature. The technology advantage is one that has driven tremendous value for companies over the last decade plus yet it is not structural in nature. In fact, technology has shown that it can hurdle all of these structural barriers to entry. A couple of people in a garage, or dorm room as we have seen happen, can take on the industry titans and they have no advantage related to structure.
Little needs to be said regarding the increased level of uncertainty in the business environment. The pace of change has led to less than rational decisions to be made covering everything from acquisitions of questionable value to expansion into unrelated industries. The emergence of ‘non-traditional’ competitors creates a playing field where it is difficult to anticipate the moves of who you think your competition is. And consider the tremendous power consumers of your product and service now have and another element of uncertainty gets brought into the mix.

This is not to say that the more traditional frameworks have lost their value. On the contrary, they still have relevance but in a different way. They are great for framing the discussion but they are not tools to be used exclusively in developing strategy and need to be augmented in order to gain a view of the entire landscape.

Strategy is Not Enough

November 24th, 2009

Recently I published an article in Baseline Magazine entitled Strategy is Not Enough. The premise of the article is essentially that it is not enough to define a strategy – technical or business – without taking an honest assessment of the capabilities your organization possesses. Developing a perspective of what you are good at, and not so good at, and laying that against the capabilities that your new strategy require you to be good at can be quite enlightening.

In the day, everyone knew and understood Dell’s business strategy. There were business case studies developed around the make-to-order model, supply chain management, and logistical aspects of how Dell continually out-performed Gateway, IBM, Compaq, etc. It wasn’t that Compaq didn’t know what to do when they attempted to mimic Dell’s strategy. It was that they couldn’t do it because they didn’t have the capabilities.

As I saw this scenario played out over and over it led me to a very simple principle that I try and carry forward with each of my clients when we are undertaking a strategy development initiative. The way I measure the best strategy is not simply the most profitable one on paper, it is not the most cost-efficient one on paper. Nor is it the one that introduces the next great product on paper. In the end the best strategy is the one that you can execute.