IT Leaders’ Top 5 Outsourcing Headaches
Lately, we at Seerene have been hearing from many companies looking for better ways to manage their outsourcing vendors. Since outsourcing first gained steam during the shift to offshore development back in the ’90s, IT services have continued to evolve. The industry is now well on its way to becoming a trillion-dollar market, and demand is at an all-time high.
Companies increasingly rely on software to run their business, yet it often requires expertise and specialization that is outside their wheelhouse. They find it’s faster and less risky to pull in providers who know how to implement and manage the systems at scale. As we talk with enterprises and domain experts about their outsourcing strategies, I’ve noticed the following recurring themes that come up again and again:
1. Keeping up with the Joneses. Business is intensely competitive. That’s why, when a company hears that a competitor in their industry has signed a big outsourcing contract with, say, Accenture, they want to know: “What are they outsourcing? Should we be doing the same? Should we give everything to one vendor or spread our work across multiple vendors?” Everyone’s looking for an edge, and outsourcing can play a key role.
2. Finding the right mix. IT teams often struggle with evaluating their providers and rationalizing the optimal blend of in-house and outsourced projects across their portfolio. Since outsourcers don’t publish any kind of standard metrics, you can’t really compare apples to apples. Vendor selections are typically based on hourly rates or perceived customer satisfaction, which is influenced more by the provider’s marketing and account management than by impartial data.
3. Measuring outsourcing value. Many IT leaders say that 80% of their vendor management is done in Excel or Access, or via weekly or monthly status reports they get from their outsourcers. They don’t have real transparency or timely reporting, which makes it near-impossible to determine know if they’re getting high quality at a reasonable price. The client often doesn’t know how to measure productivity or determine if they have the right number of resources on a project.
4. Client frustration with vendors. Unfortunately, we know that nearly 50% of enterprises are dissatisfied with their incumbent IT service provider. Often, IT teams feel stuck with the multi-year deals that their corporate procurement group negotiated, and don’t know what leverage they have to make things better. When there are problems, it is most often due to a lack of understanding surrounding the business requirements. This leads to costly rework and missed milestones. One common solution is to nearshort or bring working back in-house to improve communication and get better alignment.
5. Procurement’s role in contract negotiation. Most companies’ outsourcing contracts are negotiated by a central procurement team. As a result, hourly rates and cost cutting tend to drive the conversations and determine vendor selection. As companies shift away from long-term outsourcing contracts, and towards a mentality of agile innovation, real-time metrics and continuous improvement are all the more important.
The era of outsourcing’s focus on labor arbitrage has come and gone. It’s now more about automation and tools that boost productivity, but since these cannibalize billable hours, some vendors are resistant to provide transparency. At the same time, they want to better meet their clients’ expectations, and many outsourcers are making moves towards near-shoring to ease communication with their clients and ultimately improve the quality of work they deliver. For these vendors to become a true extension of your internal team, it’s time to embrace data-driven outsourced development.
