The vanilla outsourcing machine
The mainstream IT world seems to distrust individuality and homogenises it away quickly. For instance, in order to remove existing proprietary lock-in and prevent any more from developing, we all moved to Unix and Wintel and ITIL. It’s fair to say that some of these stampedes were motivated by customers and suppliers adopting a solution that worked for someone else, and so can be called diffusion of innovation which is a GOOD THING; nevertheless overall we seem to tolerate a surprisingly small range of solutions at any one point.
Another instance is the convergence of IT outsourcing. This column will look at IT outsourcing in that light, to see where it is homogenous and where there are real differences. It is written with the outsourcing entity (customer) in mind; to start a discussion on what to expect when looking around the market. After the first paragraph you can tell I’m going to exaggerate a little to make my point.
The number one reason for outsourcing is to reduce cost. The Vanilla Outsourcing Machine (VOM) has therefore been optimised for cost and accordingly delivers a low total cost, i.e including the retained organisation. Even after the service provider’s margin there is normally a large enough real saving to the customer to justify the outsourcing decision.
Adam Smith understood why outsourcing cost is low – just like the manufacturers of pins, outsourcers gain efficiency benefits from specialisation and division of labour. There are also large economies of scale – only very large companies can afford the investment in offshore locations and the development of infrastructure both hard and soft, which an outsourcing customer can share in. There is no mystery to any of this and no secret recipe which can’t be replicated, which is why people can and do move freely between service providers. In the evolution of the VOM there has been a convergence of process and technology which bring very similar capability and cost for the various standard offerings, with some standard options and limited tailoring to fit to customer requirement.
The net result is that the large service providers have broadly comparable costs within their respective core business. Actual pricing tends to reflect how keen they are to get the business rather than a lower cost structure or a desperate supplier about to go out of business.
Often the search for improved capability is also a driver for outsourcing, for example bulding a platform for expected growth, or access to new expertise. Sometimes this objective falls away during the sales cycle, so that in the end the lower price is chosen over the better platform for the future. But for many enterprises, Vanilla Outsourcing may well be a step up from their existing modus operandi, and one that can scale well.
Of course, although there might not be real differentiation from cost or capability, that doesn’t mean that outsourcing isn’t a good idea and won’t be of benefit to the customer.
The VOM supports ITIL; everybody does processes broadly the same way. It will generally operate and support any hardware or software, so there is no differentiation here either.
Generally the VOM doesn’t do ‘Innovation in the large’: it produces vanilla outsourcing. Innovation could have been included in the mix but then the cost would have been higher, and price is the more important factor in practice. So innovation of that type may be sales talk, or an optional extra if you believe that an outsourcer will have the skills to deliver the kind of innovation or transformation you’re looking for.
That is not to deny the importance of ‘Innovation in the small’. Is the service provider an organisation that learns? Does it merely answer Service Desk calls in a scripted way or does it analyse why customers call and come forward with suggestions to prevent problems? Does it have a way of looking for innovations from other accounts, once it knows what types of innovation the customer wants? Over the term of an agreement, these are important factors.
There is still real differentiation of supplier’s focus on some services, countries and languages. Their material and especially their customers will reveal what these are. Adding services outside the core offering is likely to pose disproportional pricing or technical challenges (or both).
The other set of real differences to highlight here flows from the service providers’ internal governance structure and how these allow responsiveness to an individual customer. Is the Delivery Director the front man for a global structure that puts different labels on the same bottles of vanilla, or can he bring about local customisation that introduce some non-standard elements? Long after the sales team has left, these make a difference to the customer – non-standard service desk hours; temporary requirements for scaling resource levels up or down; changes in the customer’s business size and locations; non-standard management software that happens to suit the customer. Another example of the importance of internal governance lies in the measures by which the delivery organisation is motivated – whether to seek customer satisfaction, upsell or to save on quality.
As a summary, then, pressures to converge has lead to the emergence of a Vanilla Outsourcing Machine that doesn’t leave much real differentiation on cost, capability or innovation. However, pricing does vary depending on how keen the service provider happens to be on a particular deal at a particular time. There are still real differences arising from market positioning, internal governance and willingness to lean and adapt.
An afternote: none of this is having a go at service providers. Indeed, it may be argued that their similar response to the requirements of actual and prospective customers show that they understand those requirements well and have responded well to them.