An outsourcing strategy is a lot like a personal finance portfolio. You should diversify to manage risk.
The outsourcing model that has worked for your company over the past five years is probably not as effective as it could be. Today, with more options to choose from, companies need to consider how outsourcing, offshoring, nearshoring, onshoring, and insourcing all play together in the right mix to get maximum value.
We are also at a point where outsourcing to one or two big providers does not make sense, because companies lose the ability to take advantage of best-of-breed providers that are out there.
At Mindtree, we are seeing more and more large contracts being broken up into smaller pieces. One reason is that there's risk in placing large deals with one provider. Another reason is to allow best-of-breed providers to participate. This movement towards best-of-breed outsourcing models puts a lot of pressure on vendor management organizations (VMOs), because it means the VMO must be intimately aware of the many diverse companies in the market and it must come up with a governance model to manage them. This is not easy, but the payoff for getting this right is too large to ignore.
At its most simple, the outsourcing market can be categorized as follows:
Offshore -- If cost reduction and scale are the main drivers, there is no better place to find talent than India. India remains the most sought after location for the outsourcing of applications or projects where the main business goals are cost reduction and scale.
Nearshore -- Whether this is Eastern Europe for Western European companies or Canada or LATAM for US companies, nearshore is appealing for certain projects where closer proximity is required. But most companies view their nearshore partners as working in those local regions only. For example, a nearshore partner in Mexico or Brazil would be there only to support the business in that region.
Onshore -- More companies are seeking onshore options for projects requiring ongoing dialogue and communication with users and for projects delivered through Agile methodologies. In addition to Agile, we are seeing an increased need for testing and business intelligence projects to be delivered in onshore centers, because key components of these projects require constant interaction.
Insourcing -- The consensus here is that some companies have outsourced too much and are now moving to bring certain projects back in-house. It is critical for companies to retain core competencies in areas like architecture, business analysis, program management, and subject matter expertise. It is also important that your outsourcing partners are able to work well with the insourced teams.
The best outsourcing model can also help companies align with partners who really excel in certain areas. Forward-thinking outsourcing strategies are typically based on a multi-vendor model where each vendor gets used for its given area of strength. When companies create "towers" across their business needs, it then becomes easier to select a partner with the best credentials.
In most cases, this will lead to a matrix model that clearly maps out both functional and technology needs. Examples of towers are e-commerce (digital), supply chain, testing, mobility, information management (data), agile development, legacy application maintenance and support, and infrastructure.
When companies see their IT landscape in terms of towers it becomes clear that a multi-vendor model is required and that best-of-breed partners should be selected. This is because no one vendor can be good at everything. Size is also a factor. The best outsourcing strategy includes partners of all sizes -- large, mid-size, and specialty boutiques.
There is a parallel between an outsourcing strategy and a personal-finance portfolio in that you want a combination of diversity, risk-mitigation, and a track record of performance. It is a huge risk to park all of your money in a single fund. The same is true for outsourcing. In addition to aligning partners by their sweet spots, a healthy outsourcing portfolio will include partners who are the best in offshore, nearshore, onshore, and local development. Typically this will mean companies need to tie up with large, mid-size, and boutique partners around the globe.
Again, this is a big challenge for the VMO team, but when done right, companies will see cost reductions, faster time-to-market of applications and products, and higher customer satisfaction. The best-of-breed outsourcing model is the path to get you there.
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. We've got a management crisis right now, and we've also got an engagement crisis. Could the two be linked? Tune in for the next installment of IT Life Radio, Wednesday May 20th at 3PM ET to find out.