What exactly is outsourced IT? Its many flavors.

What do businesses really mean when they “outsource IT”?  The video interiew below provides a quick overview of the elements of outsourcing in the context of a small business.

A business can outsource any part of IT that is not considered a core competence or a value adding activity in the long run following the usual “Buy Vs. Make” decision points in strategic sourcing. In an IT / ITES (IT Enabled services) context what does this mean and how do these firms engage? Hit the jump to see.

 

Needless to say outsourcing exists in many flavors. Business Process Outsourcing or BPO, also loosely clubbed with IT Enabled Services, is one such which can range from voice based (such as a customer support call center) to non-voice based / transactional services (example Finance functions such as Payroll/Invoice processing), HR (recruitment search) to Research. This blog is focused on IT outsourcing alone.  However many of the concepts apply to BPO and other forms of outsourcing as well. If you are interested in BPO, specifically how it is impacting global livelihoods and cultures, you can find an interesting first-hand video report by NY Times columnist and Pulitzer Prize winning author Tom Friedman (of “The World is Flat” fame) here.


Staff Augmentation:  The hiring enterprise (the buyer, such as a MetLife, Bank of America or GE or a small or medium size business) usually already has a fully functional (and sometimes fairly large) internal IT department. They sign a contract with a provider (a vendor or seller - for example a systems Integrator like Accenture or Infosys) to be able to temporarily hire and then release personnel (with suitable skills) from and to a very large pool of employees on the payroll of the seller as required by project initiation and termination schedules at the buyers end.  In an ADM context an example of this would be a Java programmer, an Oracle database administrator, quality analyst and somewhat more rarely an application architect or a project manager being hired for a few months or even years, at a preferred location.

This is where most first time outsourcers start since it is the easiest to implement. The responsibility demarcations are easy to understand, the buyer retains management control and risks of the projects, supervises the personnel at a task level (also known as out-tasking) while reaping the basic benefits of outsourcing primarily lower cost, specialist focus and high flexibility (more on these in a later post). The key performance metric of a supplying vendor is the threefold - the ability to provide high quality personnel with low turnaround and competitive hourly billing rate. The billing is on a T&M (time and material) basis.


Fixed Bid/ Fixed Price: When the buyer has a large development/Implementation Project (for example an enterprise wide ERP implementation), with a unique end point and clearly defined scope, fixed price is usually the way to go. A request for proposal, (RFP) with the scope of work is defined and published. The vendor responds with a proposal having a fixed quote and milestones leading to the end deliverable. Here the project (not only the personnel) is owned by the vendor. The project risk is borne significantly by the contractor. Mature businesses and vendors engage in this type of contracts.

Managed Services: Usually long term ongoing projects (e.g. application maintenance and production support on the software side or server administration hardware side) driven by clearly understood outcomes and goals (e.g. server uptime, or time to resolve user reported critical issues on a production application). Contracts are often fixed price for the stated duration, characterized by agreed SLAs (service level agreements), monetary incentives and penalties. The outsourcing basis here is not personnel and their skills but the outcome of their efforts as it relates to the goals of the buyer.

Hybrid: As outsourcing as buyers ad sellers of outsourcing services matured and the practice evolved, an increasing number of contracts picked up more than one of the above flavors. For example, a chunk of ADM work on managed services mode with parallel new development projects contracted out on fixed price basis for a two year contract period

While the above are the basic models of traditional IT outsourcing, there are thankfully some ways to have your cake and eat it too. They are called the Captive Sourcing and Build Operate Transfer models. Watch out for the next post to find out about more about these and some of the major players in this market.