December 18, 2014

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Transitioning from Resource-based Outsourcing to Program-based Partnerships

Much has been written about outsourcing, offshoring, near shoring, etc. by analysts, sourcing advisors and others; however, when you peel away the layers of technology and jargon, it all boils down to simple resource-based outsourcing where you replace an employee with a cheaper contractor.

Of course, in the process of converting a social science in to engineering, an employee became a resource or an FTE (full time equivalent), and enterprises needed sourcing advisors to optimize resource costs by getting into long-term contracts with service providers using resource-centric carrots and sticks (ARC – Additional Resource Charges; RRC – Reduced Resource Credit). So much so, the standard joke amongst Gen X Indian IT professionals is that “Gabbar Singh” is the father of outsourcing. (Thanks to the cult following of this Bollywood character and his legendary dialogue – “How many FTEs?” - which forms the basis of nearly every request for proposal (RFP) in the outsourcing world).

Unfortunately, resource-based outsourcing is based on the hierarchical customer–vendor relationship and relies on pitting multiple vendors against each other to ensure better resource fulfillment, to derive the short-term benefit of cost and labor arbitrage. Some multi-year contracts also factor in year-on-year productivity improvements using a mix of Run the Business (RTB) project optimizations vis-à-vis Change the Business (CTB) development projects.

However, in the current age of digital disruption, no device can provide services without a software platform, and no software can be consumed only in traditional devices. With the advent of the post PC era, the product ecosystem has become too complex for any enterprise to handle the whole spectrum on its own. There is a need for customers (enterprises) to work with suppliers (service providers) on a partnership basis, to ensure a seamless user experience across the product and its ecosystem (platform).

It is no longer sufficient if a service provider addresses only resource fulfillment or a tiny horizontal sliver of the whole spectrum of product development (e.g. domain agnostic services like Test Automation, Release Management, etc.). Service providers need to mature to a level where they can handle end-to-end product development of sub-assemblies, and require sufficient knowledge of the domain.

Service providers also need to engage with customers in risk-reward sharing business models, which again, require a much higher level of understanding of the domain to be able to arrive at reasonable estimates (ballpark estimates of the resource-based outsourcing era have resulted in multiple ship wrecks of estimates going way off track despite the hourly rate card being extremely competitive).

There are quite a few examples of engagements wherein suppliers have been able to mature beyond the cost savings aspect and have contributed to revenue impact by accelerating GTM, facilitating revenues from adjacent/emerging markets and contributing to overall ecosystem innovation and the adoption of disruptive technologies.

All said and done, this handshake of increasingly complex statements of work from both sides has resulted in more equitable partnerships (the customer and few suppliers vis-à-vis the customer and many vendors) focused on long-term symbiotic relationships, with each partner leveraging their strengths in the development of successful products and delivering phenomenal experiences to end customers.

While this transition is happening, it is yet to take off amongst the majority due to the prevalence of the win-lose mentality amongst procurement heads. Hopefully, with the support of analysts, consultants and sourcing advisors, there will soon be more relevant literature and frameworks to bring about this mindset change for win-win program based partnerships.