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May 24 2011   11:28AM GMT

Outsourcing: Cheaper in the long term?

Arun Gupta Arun Gupta Profile: Arun Gupta

Once upon a time, many moons back, the IT industry discovered multi-shore sourcing, I use this term to encompass all types of (out)sourcing initiatives, and with that came long-term contracts; 10 years was normal, and five years was seen as short-term. A lot of these that termed themselves as Strategic Sourcing also built in innovation, new technology, business process linked contracts with broad intent on changing market and business dynamics.

The fever spread across the globe and no markets or sectors remained untouched. Big or small, almost every company was expected to embrace this new wave. The euphoria within the enterprise as well as IT companies was such that companies that did not enter into such arrangements were seen as stakeholder-unfriendly or just plain dumb for not acquiring the obvious value.

As the years passed by, many companies reported rumblings of discomfort and missed expectations. Analysis appeared to indicate specific issues with companies and individuals for not putting in their best effort, safeguarding the model with zeal, lest the industry collapse with an unsustainable framework if there were indeed cracks in the carefully crafted contracts, service level agreements and reference architecture that represented the blueprint for the future. Business, profitability, political and other pressures forced reviews and scale down.

Downside of long term contracts

Prudent and rigorous reviews also exposed that long-term contracts had advantages of consistency and predictability, but lost on taking advantage of swings in the IT industry as well as did not bring in the level of efficiency or capitalization of quick market trends requiring agility that was possible with short-term relationships or with the ability to review and recast the terms of engagement, say, every alternate year. This was reflected in the drying up of the decade-long deeds and most engagements focused on a 3-5 year term. Maybe, ‘familiarity breeds complacence’ also took root; with both parties, in most cases, working hard to keep the marriage going.

There is no implication that these did not deliver to promise; some of them did and continue to do extremely well; some required significant investments in governance. Leaving aside labor arbitrage, the value captured did stretch the boundaries of discussion and measurement models.

Sustenance of outsourcing

New models now seem to be emerging with a focus on outcome-based payment schedules and collaborative investments in new technology exploration. But the basic framework has survived the troughs and waves of the economy and the resultant impact. The challenge of growth (manpower retention) has mutated the needs and solutions into new forms with service providers hungry to get back to growth of the past, but discarding the learning of unsustainable linear growth assumptions.

Outsourced contracts or strategic sourcing contracts will thus become expensive and non-tenable with linear growth not aligned to market/ business or the (in)ability to manage sudden shocks or black swans that keep coming back to surprise us. Periodic review of terms of engagement, even if they imply disruption, is the need of the hour; the IT industry, however, is not very excited.

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