|
If
you run a channel business, you're probably asking yourself, "should
we get into the outsourcing business?" Gartner Group estimates
that midsize business spending on IT management services will exceed
$15 billion by 2006. Some of the hottest segments include: call
center operations, software development and QA, manufacturing, product
design, and telesales. If you're responsible for top line growth,
you can't afford not to take a hard look.
As the former Marketing exec for HP's Outsourcing Services business
unit, I have a few lessons to pass on to you from my tenure. The
first point is to understand why companies outsource. The principal
drivers for the mid-market are to: focus on core competency, gain
time-to-market by buying rather than building wherever possible,
to reduce cost, and to increase operational efficiency. Chances
are that your own customers are asking you for an outsourced option.
Some of you are already down this path. But are you chasing a deal
or entering a business? This article offers some criteria for proactively
assessing the business opportunity.
Let's also distinguish outsourcing from support services. Outsourcing
is typically a long term business relationship with a company that
handles a business process or function. Outsourcers provide ongoing
operational responsibility not just the design/build phase arising
from a software purchase. Outsourcing is the most intimate business
relationship imaginable. There is a true sense of shared success
and failure. Here's a quick overview of outsourcing pros and cons
from both sides of the relationship.
| |
Customer Perspective
|
Outsourcer Perspective |
| Pros |
- Time-to-market; buying is faster than
building
- Cost reduction
- Leverage expertise
- Competition is doing it
- Move big ticket asset purchases off the balance sheet to expense
- Scale; grow the business without scaling costs commensurately
|
- Recurring/predictable revenue and reduced
selling costs due to 2-10 year contract terms
- Add more value to customers and command a bigger share of
your customer's wallet
- Keep competition at bay
- High switching costs could yield higher margins
|
| Cons |
- Cost savings may not meet your expectations;
expensive change orders arising from service levels can account
for a huge fraction of the bill
- Service levels might not meet expectations
- Switching outsourcers is painful; divorces can be ugly
|
- Can become a big diversion from current
business model
- Balancing operational efficiency with customer relationship
can be tough; most channel business emphasize volume not maximizing
customer value
- Potentially large capital and human resources to build up
capability
- Exiting bad business is painful |
So if you're considering offering an outsourced option, use these
four criteria to see if it makes good business sense for you:
1. Can we make money? Leading IT outsourcers make over 40% gross
margin on multi-year contracts. Will you have the operational efficiencies,
cost advantages, process maturity, and scale to make it in the business?
Remember, the key to making money in outsourcing is driving down
costs (labor, capital, software, etc.) while delivering flawlessly
against service levels so you can collect annuity revenue.
2. Can we deliver? Outsourcing is a very different business model
than traditional VAR, SI and reseller models which emphasize high
volume transactions over deep customer relationships. Remember,
you're actually running part of your customer's business on a daily
basis. Customers will escalate to the CEO in a nano-second if something
breaks. Think carefully about how well your team can deliver against
tightly specified service level agreements. And do you have enough
instrumentation to proactively avoid disasters?
3. Is the risk/reward ratio good enough? Most channel companies
are allured by big deals with juicy contract values. Outsourcing
relationships are all about managing risk. Industry leaders are
artful at quantifying risk and pricing it into the contract directly.
For example, if the customer demands five nine's availability and
two hour response times globally, are you getting paid enough to
deliver that level of service? Has your legal team reviewed the
liabilities? Do you have mutual responsibilities built into the
contract to spell out who's accountable for what?
4. Does it fit with our strategy? Becoming an outsourcer puts big
demands on your company's execution. You will likely need a separate
organization including sales specialists, pursuit teams, delivery/operations,
finance, contracts, and HR. Again, are you willing to institute
the discipline, rigorous processes, and organizational metrics to
reward the right behaviors? Let's also not forget the big cultural
shift from maximizing volume with many customers to maximizing value
with a few.
Outsourcing can be a very rewarding business strategy for your
company when it's done for the right reasons and with the right
team to execute. I promise you that you will be a trusted partner
to your customers with ensuing limitless growth possibilities. It's
no wonder that everyone is jumping on the bandwagon. But how many
will stay on the wagon long term?
Sridhar Ramanathan (Pacifica
Group) is a management consultant specializing in revenue growth
strategies for enterprise technology companies. He can be reached
at (650) 355-9700 or sridhar@pacifica-group.com.
| 
