Outsourcing Strategies

Outsourcing was the topic in the 1990's and quite frankly it was a feared discussion. It was introduced to business as a way to take cost out of the daily operational budget. Quickly, outsourcing rose to be viewed as a possible partner to application development, marketing and labor augmentation. Early in the 1990's and even now we see it morphing it's way to become more and more transparent within companies in the Fortune 500 and below. Examples of new and innovative thought leadership regarding outsourcing is emerging every day at companies like CISCO™,IBM™, AT&T™ etc.

When it first became relevant it was viewed from two disctinct directions. Fear and hope depending which side of the bench you happened to be deployed. As an employee the trend was to fear the word but as a shareholder it became something of a competitive weapon and earnings per share friend going forward. If you could move operational requirements to another company/service provider and still get the same quality and service level agreements the logic flowed that this was a good practice to endorse and clearly use to hold back rising costs. Quickly the companies that offer outsourcing like:

• HP™/EDS™
• IBM Global Services™
• CSC™
• Northrop Grumman™
• etc

began to look at marketing tiers to strategize their domain expertise. Today, you see defense contractors like Northrop Grumman™, Boeing™ and others providing complete turnkey operations from staff augmentation to full lights out support for Cities, Counties and State government requirements. A natural branch to their traditional Federal markets bread and butter. If they can build a B2™, 777™ or and F/A 18™ I'm sure they can lend a helping hand to both State & Local government as well as the commercial markets they are trending to. Of course, they must measure up and early deployments on outsourcing were mixed from a scorecard perspective. Actual savings, depending on the PowerPoint/excel spreadsheet, were generating lots of second glances as to whether or not outsourcing was providing as advertised. This was a double edged sword too. The very companies providing the outsourcing were often caught up on post sales implementation challenges not always anticipated nor covered in their original bids. This is the ouch in the overall game plan.

On the one hand you have the customer is king attitude and on the other you have a contract/agreement whereby both parties signed up to a deliverable. But, given the exposure politically the two sides would venture off the agreement to preserve the integrity of their announced relationship and try and work it out. This is where the separation of powers collapsed around the profits and loss on a budget.

We will have more on this topic in later updates regarding this topic as it is truly stabilizing across niche markets with varying degrees of success and challenges.

Perfect Mix Of Both

So, how do you grow and reduce or at a minimum keep your expenses constant as it relates to revenue? This model is crtical at this juncture for your management team and planning overall. Outsourcing should be considered if your current skilled labor is weakening (supply) or pricing you out of the market you seek.

The purest way to evaluate is based on cost. If an employee skill requirement is set at 1000/hr burdened than the outsource price should be under this rate. Simple right? Hardly, the minute you decide to base an outsourcing decision on pure rate comparison you can seal the fate of your company if you are wrong. Suppose this is an area of your business that today is not showing great value? Suppose that your forecast is this area has great future potential.

If you outsource today (above example) you may be sacraficing your future should things break down with your outsource partner over time and now that the market shifts towards this area of your business you are left with a weakened bench stregnth from this original decision.

We believe that the best approach (our opinion) is to tackle back-office or administrative functions of the business. For example:

These are just three examples that have very little impact to your core business and there are many examples of solid busines partners established across the globe to take this on.

Consolidation Trends

HP has been on a terrific rise amongst it's peers since it shed itself of it's internal problems with the former CEO, Michael Hurd has lead a focused team that flattened the company and made it extremely efficient. But EDS at this time? At the price they paid?

The point of this is that as Consolidation takes place he end user will see rising prices and Outsourcing could become more expensive and less attractive. Food for thought.

If I was a small disabled veteran status company selling services to the Government I would be smiling ear to ear on this one. If I was IBM Global Services I would be concerned.

InSourcing Trends

It works well when you have an established group within your company that is based soley on its ability to win business from companies looking to reduce their information technology spend. Your group replaces the external group (customer) with employees who have all the certifications and training to maintain the IT Operations at a lower cost.

So, if you are looking for ways to save money and you are at the same time providing this service externally then you would think you could apply this to your own operations. Sometimes this works great. Other times it takes away from your own Top Line growth as it steals the very engineering resources normally used externally. The theory is solid. The practicality of it's probable success is still a mystery to most who have attempted this.

Who you trust and when you decide to go in vs. out is a challenging management dilema. Selling off your future control (to some degree) is no easy decision. Most of the companies that have gone this direction are public corporation and face the scruitiny beyond their four walls so to speak.

The InSource model has a variablity to it that keeps a foot in the door while building unique skill sets that perhaps can be marketed outside of your corporation and be a top line contributor as well as bottom line generating. Cash is king!

You see the Federal System Integrators doing this as second nature but they are also equipped to do so as they typically long range awarded contracts that provide forecasted cash flows into the business years in advance. Nice market to focus on and a steady growth with few exceptions given the current political climate the free world is in right now.