Positioning outsourcing services

Everyone’s spouting the outsourcing, offshoring and out-tasking mantra these days. S Ramakrishnan explains how these three services should be positioned in an increasingly competitive environmen

The IT and IT-enabled service sectors represent huge growth opportunities, especially for countries such as China, India, Ireland, and the Philippines. Cost arbitrage, varying availability of skilled labour, varying career aspirations, increasing global connectivity, growing cross culturalisation, and easier international travel, all contribute to the pace of growth of these sectors.

As specific services grow within industry sub-sectors, they tend to develop their own unique vocabulary. There are several detailed and operational outsourcing terminologies such as TCO, SLA, due diligence and others. This note throws light on the vocabulary used by service companies in Western countries, trying to position themselves in the evolving and immensely competitive fields of out-tasking, offshoring, and outsourcing.

What is out-tasking?

An organisation is said to be out-tasking when it decides that a certain set of tasks, though necessary, and even perhaps critical for continuing business operations, are performed better by an external service provider. In the US, companies using others for payroll processing would be a good example of out-tasking. Though a third party is doing the work, it is normally performed in the same geographic location, generally within the same country. Such simple out-tasking has time zone and cultural advantages and also certain short-term community advantages by keeping the work localised. Out-tasking is a position achieved by companies that have a high level of operational or process excellence, typically in one or more of generic organisational support functions.

Offshoring

Offshoring is commonly understood to mean out-tasking achieved using labour or services performed in other countries. Labour cost arbitrage is often the major driver for offshoring. Over the past decade, India-based offshorers have become so proficient with IT and IT-enabled services that cost is only one of the factors enabling offshoring. India has the largest number of CMM Level 5 assessed and ISO certified organisations—several of which now offer quality consulting services to their Western clients as part of their offshore service offerings.

Every CIO, every senior executive in the information technology function is not just peripherally aware but has significant knowledge of the advantages and challenges involved in offshoring different types of application development, support, maintenance, and management. This is evident in many ways—reducing the number of middlemen operating between the end-client and offshore service provider, increasing the number of client executives from India or other offshore countries and increasing the number of joint ventures, captive IT and IT-enabled service companies in offshore countries.

Outsourcing

Outsourcing is a higher order term and is an advanced kind of out-tasking. It may include offshoring as one of its components. Most of the recent large outsourcing deals necessarily include offshoring due to specific directives from the client organisations, given the quality and wage arbitrage advantages.

How is outsourcing different?

There are several facets to outsourcing that makes it different. Outsourcing deals are normally longer term and involve larger areas of the organisation initiating the outsourcing exercise. There is normally a planned transfer of responsibility both of achieving service levels (application uptime, turnaround time, business units of work performed or processed) and agreed levels of total costs of ownership. Typical outsourcing deals also involve transfer of personnel from the client organisation to the service provider organisation.

Outsourcing deals typically involve risk and reward sharing, pricing based on business activity or results, and transition of responsibilities and assets (combinations of intellectual property, people, facilities, tools and technologies). Outsourcers achieve lower total costs of operations and increased quality of service by utilising

economies of scale, specialist knowledge, and by creating unique combinations of how the work is performed. This involves decisions on the kinds of labour pools, tools and processes used, and by undertaking efforts that significantly transform the way the unit of work is performed. A portion of this combination may involve offshoring, given the quality and economies involved.

Outsourcing deals may be considered the equivalent of marriages—great when they work and quite troublesome when they do not. Outsourcing, therefore, needs significant senior executive commitment from the client and the service provider organisations, an ability to think win-win, and planning for the long-term.

The author is vice president at Kanbay Software. He can be contacted at ramki@kanbay.com